Guildhall College

Programme: BTEC Higher National Diploma (HND) in Business Unit No and Title: Unit 9, Management Accounting: Costing and Budgeting Unite Level: H1 Assignment Ref, No:1.1.1- Management Accounting: Costing and
Budgeting.

Module Tutor: Sabir Hussain Jafri Submitted By: Md Sultan Mahmud Student ID: 11127 Date: 16th May 2010

Content:
Synopsis. . . . . . . . . . . . . . . . . . . . . . . . .. . .

Page
.3

Literature review: a. Identify and classify different types of cost: . . . . . . . . . . . . . . . . . . . . . . . . . . . .4 b. Explain the need for, and operation of, different costing methods: . . . . . . . . . 4-5 c. Calculate cost of good sold and ending inventory using the data in annexure 1 through FIFO, LIFO and AVCO techniques. . . . . . . . .5-7 d. Explain Collection, analysis and presentation of data using appropriate . ..7-9 e. Explain how to Prepare and analyse routine cost reports: . . . . . . . . . . . 9-10 f. Explain how to evaluate indicators of productivity, efficiency and effectiveness: . 10-11 g. Explain the principles of quality and value, and identify potential improvements: . . 11-13 h. Explain the purpose and the nature of the budgeting process: . . . . . . . . . . . . . . . . . . 13-14 i. Select appropriate budgeting methods for the organization and its needs: . . . 14-15 j. prepare budgets according the chosen budgeting method using data in annexure 2. . . . . . . . . . . . . 15-17 k. Prepare a cash budget using data in annexure 3. . . . . . . . . . . . . .. . 17-18 l. Calculate variances, identify possible causes and recommend corrective actions using the data in annexure 4. . . . . . . . . . . . . . . . ..18-22 m. Prepare and operating statement reconciling budgeted and actual results using the data in annexure 4. . . . . . . . . . . . . . . . . . . ..22-23 n. Report findings to management in accordance with identified responsibilities centres.23 Conclusion and recommendation: Reference: 24

The Success of McDonalds Synopsis:

Type of business: : McDonald's is one the best known brand and leading global food service retailer with more than 31,000 local restaurant serving more than 80 million people in 118 countries each day. It also the leading chain of hamburger fast food restaurant. Some of those operate by the company, some of those franchisees or by affiliates operating under joint venture agreements. McDonalds brand mission is to be our customers favourite place and way to eat, to increase market share, profitability, and customer satisfaction has produced high returns of share holders. McDonalds vision is to be world best quick service restaurant. Being the best means providing outstanding quality, service, cleanliness and value, so that the McDonalds make every customer in every restaurant smile. Im lovin it is the main slogan of McDonalds. Some of its world famous foods are Fries, Bigmac, Cheese Burger, Hambuger, Quarter pounder, Chicken Nugget, Egg McMuffin etc. It has literally changed the Americans eating habits and increasingly the habits of non-Americans. History: McDonalds founded in 1940 by Dick and Mac McDonalds in San Bernardino, in California. Based on their introduction speedee service system they established the principles of modern fast food restaurant in 1948. Business Growth & Geographical Location: McDonalds is spreading its business globally. Every year they are adding many numbers of restaurants in many countries all over the world. McDonalds has more than 31000 restaurant in 118 countries. Besides it has nine major markets in Australia, Canada, Brazil, France, China, Germany, Japan, UK and USA. McDonalds opened its first Restaurant in UK on October in1974 and by December 2004there was over 1330McDonalds operating in UK; every day in the UK, McDonald's serves over 2 million customers by delivering only the highest levels of quality, service and cleanliness.

Literature review: a. Identify and classify different types of cost:

Cost is the spent/sacrifice of time, labour and money for the goods and services to be sold and to earn profit on the services and goods for resale. Cost can be classified in different ways. Different types of cost are discussing below: Types of cost: A/direct cost: any cost which is directly related to the production of the goods and services delivered. E.g. labour in the production team etc. B/indirect cost: cost that is common or shared by more than one cost object. E.g. fuel used in the production line machine the cost for fuel on each unit is not known. C/capacity related cost: costs that are based on the amount acquired than the amount used. can be direct or indirect but in short run these cost are fixed. g depreciation of assets. D/variable cost: cost that varies with the changes in the level of activity. E.g. direct materials. E/fixed cost: The cost that doesnt changes and vary with the change in the level of activity. e.g. straight line depreciation. F/expired cost: a cost associated with the object whose benefits have been obtained or recorded. e.g. an expense i.e. cost of goods sold. G/unexpired cost: a cost associated with the object whose benefits have not been obtained or recorded. e.g. unsold inventory. H/product cost/inventory cost: cost associated with producing the product that is capitalized in the inventory. E.g. direct materials, direct labour. I/period cost: cost incurred in the current period of production. E. g research and development cost for a particular product at a particular time. J/incremental cost: cost of one or more item, unit or customer .e.g. cost of one passenger on airline. K/implicit costs: instated and unrecorded costs. E.g. opportunity costs. L/relevant cost: difference b/w costs when 2 or more products are involved. E.g. cost if one product is dropped. M/life cycle cost: cost associated with the various stages of a products life cycle. E.g. development and design, production, distribution etc.[p1]

b. Explain the need for, and operation of, different costing methods:
Different industries follow different methods for ascertaining cost of their products. The method to be adopted by business organization will depend on the nature of the production and the type of out put. The following are the important methods of costing.

Job Costing: Job costing is concerned with the finding of the cost of each job or work order. This method is followed by these concerns when work is carried on by the customers request, such as printer general engineering work shop etc. under this system a job cost sheet is required to be prepared find out profit or losses for each job or work order. Contract Costing: Contract costing is applied for contract work like construction of dam building civil engineering contract etc. each contract or job is treated as separate cost unit for the cost ascertainment and control. Batch Costing: A batch is a group of identical products. Under batch costing a batch of similar products is treated as a separate unit for the purpose of ascertaining cost. The total cost of a batch is divided by the total number of units in a batch to arrive at the costs per unit. This type of costing is generally used in industries like bakery, toy manufacturing etc. Process Costing: This method is used in industries where production is carried on through different stages or processes before becoming a finished product. Costs are determined separately for each process. The main feature of process costing is that output of one process becomes the raw materials of another process until final product is obtained. This type of costing is generally used in industries like textile, chemical paper, oil refining etc. Service (Operating) Costing: This method is used in those industries which rendered services instead of producing goods. Under this method cost of providing a service is also determined. It is also called service costing. The organization like water supply department, electricity department etc. are the examples of using operating costing. Operation Costing: This is suitable for industries where production is continuous and units are exactly identical to each other. This method is applied in industries like mines or drilling, cement works etc. Under this system cost sheet is prepared to find out cost per unit and profits or loss on production. Multiple Costing: It means combination of two or more of the above methods of costing. Where a product comprises many assembled parts or components (as in case of motor car) costs have to be ascertained for each component as well as for the finished product for different components, different methods of costing may be used. [p2]

c. Calculate cost using appropriate techniques:

FIFO Method: Date Feb. 1 Feb. 4 200 7 1400 Units Purchase Rate Amount $ $ Units COGS Rate Amount $ $ Units 800 800 200 Balance Rate Amount $ $ 6 4800 6 7 4800 1400

Feb. 10

200

1600

800 200 200 800 6 4800 200 200 200 200 400 200 200 100 (100) 7 8 8 8 1400 1600 800 (800)

6 7 8 7 8 7 8 8

4800 1400 1600 1400 1600 1400 1600 3200

Feb. 11 Feb. 12 400 8 3200

Feb. 20

300 400 400 600 1000

8 8 8 9

2400 3200 3200 5400 8600

Feb. 25 Feb. 28 600 1400 9 5400 11600

1200

7800

So, Costs of goods sold (COGS) =$ 7800 Ending Inventory=$ 8600 (1000 Units) LIFO Method: Date Feb. 1 Feb. 4 Feb. 10 200 200 7 8 1400 1600 Units Purchase Rate Amount $ $ Units COGS Rate Amount $ $ Units 800 800 200 800 200 200 200 200 400 400 8 3200 400 100 (100) 8 6 6 3200 600 (600) 8 7 6 1600 1400 2400 Balance Rate Amount $ $ 6 4800 6 7 6 7 8 4800 1400 4800 1400 1600

Feb. 11

400 400 400 300 400

6 6 8 6 6

2400 2400 3200 1800 2400 6

Feb. 12 Feb. 20 Feb. 25

Feb. 28

600 1400

5400 11600 1200 8600

400 600 1000

6 9

2400 5400 7800

So, Costs of goods sold (COGS) =$ 8600 Ending Inventory=$ 7800 (1000 Units) AVCO Method: Date Feb. 1 Feb. 4 Feb. 10 Feb. 11 Feb. 12 Feb. 20 Feb. 25 Feb. 28 600 1400 9 5400 11600 1200 8100 400 8 3200 500 (100) 7.25 7.25 3625 (725) 200 200 7 8 1400 1600 800 6.5 5200 Units Purchase Rate Amount $ $ Units COGS Rate Amount $ $ Units 800 1000 1200 400 800 300 400 1000 1000 Balance Rate Amount $ $ 6 4800 6.2 6.5 6.5 7.25 7.25 7.25 8.3 6200 7800 2600 5800 2175 2900 8300 8300

So, Costs of goods sold (COGS) =$ 8100 Ending Inventory=$ 8300 (1000 Units) [p3]

d. Collect, analyse and present data using appropriate techniques:

Methods of Data Collection There are four main methods of data collection.

Census. A census is a study that obtains data from every member of a population. In most studies, a census is not practical, because of the cost and/or time required.

Sample survey. A sample survey is a study that obtains data from a subset of a population, in order to estimate population attributes. Experiment. An experiment is a controlled study in which the researcher attempts to understand cause-and-effect relationships. The study is "controlled" in the sense that the researcher controls (1) how subjects are assigned to groups and (2) which treatments each group receives. In the analysis phase, the researcher compares group scores on some dependent variable. Based on the analysis, the researcher draws a conclusion about whether the treatment ( independent variable) had a causal effect on the dependent variable.

Observational study. Like experiments, observational studies attempt to understand cause-and-effect relationships. However, unlike experiments, the researcher is not able to control (1) how subjects are assigned to groups and/or (2) which treatments each group receives.

Methods of Data Analysis 1. Typology - a classification system, taken from patterns, themes, or other kinds of groups of data. Ideally, categories should be mutually exclusive and exhaustive if possible, often they aren't. 2. Taxonomy- A sophisticated typology with multiple levels of concepts. Higher levels are inclusive of lower levels. 3. Logical Analysis/Matrix Analysis- An outline of generalized causation, logical reasoning process, etc. Use flow charts, diagrams, etc. to pictorially represent these, as well as written descriptions. 4. Event Analysis/Microanalysis- Emphasis is on finding precise beginnings and endings of events by finding specific boundaries and things that mark boundaries or events. After find boundaries, find phases in event by repeated viewing. 5. Semiotics- Determine how the meanings of signs and symbols are constructed. Assume meaning is not inherent in those; meaning comes from relationships with other things. 6. Narrative Analysis- Narrative analysis could involve study of literature or diaries or folklore.

Presentation of Cost Data under Marginal Costing and Absorption Costing Marginal costing is not a method of costing but a technique of presentation of sales and cost data with a view to guide management in decision-making.

The traditional technique popularly known as total cost or absorption costing technique does not make any difference between variable and fixed cost in the calculation of profits. But marginal cost statement very clearly indicates this difference in arriving at the net operational results of a firm. Following presentation of two Performa shows the difference between the presentation of information according to absorption and marginal costing techniques: MARGINAL COSTING PRO-FORMA Sales Revenue Less Marginal Cost of Sales Opening Stock (Valued @ marginal cost) Add Production Cost (Valued @ marginal cost) Total Production Cost Less Closing Stock (Valued @ marginal cost) Marginal Cost of Production Add Selling, Admin & Distribution Cost Marginal Cost of Sales Contribution Less Fixed Cost Marginal Costing Profit ABSORPTION COSTING PRO-FORMA Sales Revenue Less Absorption Cost of Sales Opening Stock (Valued @ absorption cost) Add Production Cost (Valued @ absorption cost) Total Production Cost Less Closing Stock (Valued @ absorption cost) Absorption Cost of Production Add Selling, Admin & Distribution Cost Absorption Cost of Sales Un-Adjusted Profit Fixed Production O/H absorbed Fixed Production O/H incurred (Under)/Over Absorption Adjusted Profit xxxxx

xxxx xxxx xxxx (xxx) xxxx xxxx (xxxx) xxxxx (xxxx) xxxxx xxxxx

xxxx xxxx xxxx (xxx) xxxx xxxx (xxxx) xxxxx xxxx (xxxx) xxxxx xxxxx

[p4]

e. Prepare and analyse routine cost reports:

Routine costs report are prepared on the (expenses)costs incurred for the day to day operations of the business. these reports are made to check the over all performance of the business and helps in cutting the costs and doing the work efficiently and appropriately. The Cost reports in Project are a powerful and very effective means of tracking the fiscal health of a project. By using these reports, you can quickly and accurately focus on the pressing cost issues and catch potential problems early. These reports provide an up-to-date record of commitments and expenditure within budgets so that unexpected over/under run costs do not result, ensuring that all transactions are properly recorded and authorised and, where appropriate, decisions are justified. Analysis of cost reports: By the time you get to the analysis of your cost reports, most of the really difficult work has been done. It's much more difficult to: define the research problem; develop and implement a sampling plan; conceptualize, operationalize and test your measures; and develop a design structure. If you have done this work well, the analysis of the cost reports is usually a fairly straightforward affair. In all but the simplest of studies, you need to set up a procedure for logging the information and keeping track of it until you are ready to do a comprehensive cost analysis. Different researchers differ in how they prefer to keep track of incomings and out goings. In most cases, you will want to set up a database that enables you to assess at any time what is already in and what is still outstanding. Analysing of cost reports helps in making future budgets and to cut the expenses with the performance appraisal, in order to run the business accordingly it is essential to prepare these reports and to analyse the overall performance of the business.

f. Calculate and evaluate indicators of productivity, efficiency and effectiveness:

The words efficiency and effectiveness are often considered synonyms, along with terms like competency, productivity, and proficiency. However, in more formal management discussions, the words efficiency and effectiveness take on very different meanings.

Indicators of Productivity:
1. Labour Productivity = (Output / No of employee) It indicates the quantity of goods and services that someone can produce with a given expenditure of effort, usually measured or averaged out in terms of time spent working or labour time. 2. Capital Productivity = (Output per capital employed = Output / Capital employed) It indicates that how much output get back by capital employing. 3. Machine Productivity = (Output per machine = Output / Machine hours for paid) It indicates that how much product we get back by the machine per hour.

Indicators of Efficiency = (Actual standard hours / Actual hours worked X 100%)

It indicates that how we can produce more standard goods at lower costs & time.

Indicators of Effectiveness = (Actual hour work / Standard hour work X 100)

It indicates that how we can utilize our resources to produce goods. Some process efficiency measures are:

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cycle time per unit, transaction, or labor cost; queue time per unit, transaction, or process step; resources (dollars, labor) expended per unit of output; cost of poor quality per unit of output; percent of time items were out of stock when needed; percent on-time delivery; and inventory turns.

Some effectiveness measures are:

how well the output of the process meets the requirements of the end user or customer; how well the output of the sub process meets the requirements of the next phase in the process (internal customers); and how well the inputs from the external suppliers meet the requirements of the process. [p6]

g. Explain the principles of quality and value, and identify potential improvements: Quality management is becoming increasingly important to
the leadership and management of all organisations. It is necessary to identify Quality Management as a distinct discipline of management and lay down universally understood and accepted rules for this discipline. . The latest revision (version 2008) of ISO9000 standards are based on these principles. Link to Useful Quality Management Resources Definition of Quality Principle: "A quality management principle is a comprehensive and fundamental rule / belief, for leading and operating an organisation, aimed at continually improving performance over the long term by focusing on customers while addressing the needs of all other stake holders". The eight principles are ... 1. Customer-Focused Organisation 2. Leadership 3. Involvement of People 4. Process Approach 5. System Approach to Management

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6. Continual Improvement 7. Factual Approach to Decision Making and 8. Mutually Beneficial Supplier Relationships.

Principles of Value
There are twelve principles of value used to determine highest and best use and to establish value (they will be covered in detail in Valuation Concepts): 1. Anticipation: the anticipated future benefits to be derived from the property. 2. Balance: the equilibrium reached in a free market when complementary uses of neighboring property permit maximum value for individual properties and the neighborhood. 3. Change: the continuing effects of economic, social, and governmental forces on the property and its environment, resulting in continuous change in market value which must be anticipated. 4. Competition: the tendency of a highly profitable use to be duplicated by others until an excess supply of similar goods and services reduces profitability, and thus value. 5. Conformity: the creation of maximum market value through a reasonable degree of similarity of property use, appearance, and owner demographics. 6. Consistent Use: the requirement to value all aspects of a property: land, improvements, and personal property on the basis of a single class of usage at any given point in time. 7. Contribution: the incremental amount of value contributed to the total value of a property by any given component, as opposed to the actual cost of the component. 8. Demand: the amount of a commodity, good or service that would be purchased at various prices during a specific period. 9. Substitution: the market value of a property is affected by the cost of obtaining an equally desirable and valuable property as a substitute. 10. Supply: the amount of a commodity, good or service that would be offered for sale at various prices during a specific period. 11. Surplus Productivity: the net real property income after the costs of labor, capital, and management have been paid. 12. Variable Proportions: When the quantity of one productive service is increased in equal increments, while the quantities of other productive services remain fixed, the resulting increment of product will decrease after a certain point. Potential improvements: the purpose of improvement is the implication of value on customers perception regarding the value of the product.by improvements it become possible to derive an analytical model that recognizes the implication of companys efforts to improve the the design

12

quality conformance on product value as perceived by the customers.quality should be improved as it costs as a performance indicator. Transforming quality cost measurements into value provides a better explanation regarding the effect of prevention and appraisal activities on the quality improvement indicators. Thus, the value of quality improvements is a measure of return on quality improvements (ROQI), which indicates whether the quality improvement efforts gave higher, fair, or lower return. [p7] ( Author:JENS J DAHLGAARD)

h. Explain the purpose and the nature of the budgeting process:

The Purpose of a Business Budget Business budgeting is a basic and essential process that allows businesses to attain many goals in one course of action. There are several goals that many businesses seek to achieve (or should be trying to work toward) when they create and implement a budget. These goals include control and evaluation, planning, communication, and motivation. Control and Evaluation Perhaps the most obvious of budgeting goals is that of control and evaluation. Budgeting allows a company to have a certain degree of control over costs, such as not allowing many types of expenses to take place if they were not budgeted for, or assigning responsibility for these expenses. A budget also gives a company a benchmark by which to evaluate business units, departments, and even individual managers. Unfortunately this purpose of budgeting can cause employees to have negative feelings about the budgeting process because their compensation and, in certain cases, their jobs, may be dependent on meeting certain budgeting goals. This is especially true in companies that focus on the evaluation purpose of budgeting and when the budgeting is a top-down process, rather than a participative one. Planning Planning is another purpose of budgeting, and is arguably its primary purpose. Budgeting allows a business to take stock of revenue and expenses from the previous period, and judge where the business will be in future periods. It also allows the organization to add and remove products and services from its plan for the future period. In larger organizations, the budgeting process may be completed by individual business units and compiled to form a master budget for the organization. This allows top management to get a picture of the entire business so they are able to better plan accordingly. Communication and Motivation Other goals that an organization may use its budget to achieve that are less obvious include communication and motivation. Budgets allow management to communicate goals and to promote goal congruence so resources can be coordinated and focused in key areas. Budgets also allow a company to motivate its employees by involving them in the budget. While top-down budgeting does not accomplish this goal very effectively, participative budgeting can be motivating. When an 13

employee is involved in creating his or her departments budget, that person will be more likely to strive to achieve that budget. Although business budgeting is a procedure that most businesses go through, it can be a greater tool than many people (and businesses) realize. The budgeting process can allow companies to communicate and achieve their goals, and allow them to monitor those achievements as well. It is also an important step in overall business strategic planning.

The nature of a budget

Budget process refers to the process by which governments create and approve a budget. The Financial Service Department prepares worksheets to assist the department head in preparation of department budget estimates The Administrator calls a meeting of managers and they present and discuss plans for the following years projected level of activity. The managers can work with the Financial Services, or work alone to prepare an estimate for the departments coming year. The completed budgets are presented by the managers to their Executive Officers for review and approval. Justification of the budget request may be required in writing. In most cases, the manager talks with their administrative officers about budget requirements. Adjustments to the budget submission may be required as a result of this phase in the process. [p8]

i. Select appropriate budgeting methods for the organization and its needs:
A budget is nothing more than a written estimate of how an organization or a particular project, department, or business unit will perform financially. If you can accurately predict your company's performance, you can be certain that resources such as money, people, equipment, manufacturing plants, and the like are deployed appropriately. Kinds of budgets When it comes right down to it, you can budget any activity in your organization that has a financial impact. Two of the most common budgets are Cash budget: An estimate of a company's cash position for a particular period of time. Operating budget: A business's forecasted revenues along with forecasted expenses, usually for a period of one year or less. Line items in your operating budget may include: Labor budget: The total labor cost to be expended for a set period of time calculated by taking every person in an organization, department, or project and multiplying the number of hours they are expected to work by their wage rates. Sales budget: An estimate of the quantity of goods and services that will be sold during a specific period of time. Production budget: A forecast thatstarts with the sales budget's estimates of the total number of units projected to be sold, then translates this information into estimates of the cost of labor, material, and other expenses required to produce them. 14

 Expense budget:

An estimate prepared for travel, utilities, office supplies, telephone, and many other common business expenses for a given period. Capital budget: The total costs and maintenance fees planned for your company's fixed assets. The best kind of budget is the one that works. You can choose from three key approaches to developing a budget: Top down: Budgets are prepared by top management and imposed on the lower layers of the organization. Top down budgets clearly express the performance goals and expectations of top management, but can be unrealistic because they do not incorporate the input of the very people who implement them. Bottom up: Supervisors and middle managers prepare the budgets and then forward them up the chain of command for review and approval. These budgets tend to be more accurate and can have a positive impact on employee morale because employees assume an active role in providing financial input to the budgeting process. Zero-based budgeting: Each manager prepares estimates of his or her proposed expenses for a specific period of time as though they were being performed for the first time. In other words, each activity starts from a budget base of zero. By starting from scratch at each budget cycle, managers are required to take a close look at all their expenses and justify them to top management, thereby minimizing waste. Each has its advantages and disadvantages, and each approach can work well, although the pendulum is clearly swinging in favour of the bottom up approach. [p9] (Author:GOLDBERG DROR)

j. prepare budget according the chosen budgeting method: Grose Limited

ANNEXURE 2

Sales Budget Units 10,00 Sales budget 0 00 Selling price 1 1,000,000 Total

Production Budget units/hour s Sales units 10,00 Component unit cost Tota l

15

0 2,00 Closing units 0 4,00 Less:Opening units 0 8,0 Units to be produced 00

XY Component WZ Production hours Finishing hours

5 3 4 2

1 1 5 7

5 2 2 0 1 4

Material usage Budget

Component XY (number of stock to be produced * number of units of Component XY)

40,00 8000 * 5 0

Component WZ (number of stock to be produced * number of units of Component WZ)

24,00 8000 * 3 0

Material Purchase Budget XY 40,00 Material to be used units 0 20,00 Closing units 0 16,00 Less:Opening units 0 44,0 Units to be purchased 00 44,0 Units to be purchased ($) 00 00 00 13,2 00 26,4 0 9,6 0 12,00 WZ 24,00

Direct Labour Budget Productio n

Finishing

Number of hours per unit Number of stock to be produced Hours required Rate per hour Total Labour Cost ($)

4 8,000 32,00 0 5 160,00 0

2 8,000 16,00 0 7 112,00 0

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ANNEXURE 3

Q1 1,90 Cash received from Debtors (w-1) Short term investments (w-2) Cash paid to Trade Creditors (w-3) Cash paid to Other Creditors (w-5) Dividend paid Tax paid Captial expenditure Sale of Plant and equipment Net cash inflow/(outflow) Opening Cash Closing Cash Workings 1 Cash received from Debtors 2 Opn debtors Sales Less:closing debtors 00 2,00 0 3 00 1,9 00 50 0 0 0 0 60 (1,15 0) (4 50) (2 00) (1 50) 10 15 25 00) 0) 0 40)

Q2 2,95 0 ( 10 (1,85 0) (5 00) (4 70) 90 25 1 15 05) 30

Q3 1,45

(1,51 (6

[p10]
k. Prepare a cash budget:
Flossy Limited Cash Budget

(6 20) 1 15 (5

30 50 3,00 0 35 00 2,9 50

3 1,50 4 1,4

Short term investments Opening Balance Closing Balance Cash inflow/(outflow) 60 60 40 ( 40) 10 40 30

[p11]
l. Calculate variances, identify possible causes and recommend corrective action: Frost Production Company

Cash paid to Trade Creditors 1 Opening Balance Purchases (W-4) Less:Closing Balance 10 1,22 0 1 80 1,1 50 50 0 1,8 10 0 16 50 1,5 0 1,83 0 1 18 60 1,50 1

Purchases made(assumed on credit) 1,20 Cost of sales Total Cost Closing Balance Less:Opening Balance 1,80 0 1 20 1 00 1,2 30 0 1,8 00 0 12 50 1,5 15 50 1 0 1 1,50

Variances

1
5

Purchases

Direct Material Variance 20

Cash paid to Other Creditors Opening Balance Other expenses Less:Closing Balance

Direct material should be used (15*2*90) =

50 50 50 4 50 4

50 50 0 50 5 00

50 6 00 50 6 00

2,70 17

0 2,10 Material actually used Variance 2 Direct Labor Variance 3,60 Direct Labor should be used (40*90) = Labour actually used Variance = 0 4,00 0 (40 0) A = 0 60 0 F

Variable Production Overhead Variance

90 Variable overheads should be incurred (90*10)= Variable overheads actually incurred Variance 4 Fixed Production Overhead Variance 1,80 Fixed overheads should be incurred (90*20)= Fixed overheads actually incurred Variance = 0 1,60 0 20 0 F = 0 1,00 0 (10 0) A

Variances of elements of cost

Material usage variance 1,35 Direct material units should be used Material actually used Variance units = = 0 1,40 0 (5 0) A 18

(10 Variance 2 Material rate variance 2.0 Budgeted rate Actual rate Variance /unit Variance 0 1.5 0 0.5 0 70 0 F F 0) A

Labour efficiency variance 90 Labour hours should be used Labour actually used Variance hours Variance = = 0 80 0 10 0 40 0 Labour rate variance 4.0 Budgeted rate Actual rate Variance /unit Variance 0 5.0 0 (1.0 0) (80 0) A A F F

Variable overhead efficiency variance 90 Overhead hours should be used Overhead hours actually used Variance hours Variance = = 0 80 0 10 0 10 F F 19

0 6 Variable overhead rate variance 1.0 Budgeted rate Actual rate Variance /unit Variance 0 1.2 5 (0.2 5) (20 0) A A

Fixed overhead efficiency variance 90 Overhead hours should be used Overhead hours actually used Variance hours Variance = = 0 80 0 10 0 20 0 F F

Fixed overhead rate variance 2.0 Budgeted rate Actual rate Variance /unit Variance **F=Favorable **A=Adverse 0 2.0 0 -

Causes of variances: Material price

(F) unforeseen discounts received, greater care taken in purchasing, change in material standard.

Material usage

(A) defective material, excessive waste, theft, stricter quality control.

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Labour rate

(A) wage rate increase

Labour efficiency

(F) output produced more quickly than expected because of work motivation, better quality of equipment or materials

Overhead expenditure

(A) increase in cost of services used, excessive use of services, change in type of services used

Overhead volume

(A) production less than budgeted

Recommendation: Material price

Material standard should be kept.

Material usage

Defective material, excessive waste, theft, stricter quality should control to make it favourable.

Labour rate

Manager should be efficient in controlling labour.

Overhead expenditure

Efficient in cost of services used, excessive use of services, change in type of services used.

Overhead volume

Production should be increased. [p12]

m. Prepare and operating statement reconciling budgeted and actual results: Frost Production Company Operating statement 21

(Reconciling budgeted and actual results) Total cost= (100 units* 100 per unit total cost) = 10,000 Cost volume variance= (10 units* 100 per unit total cost) = 1,000 Standard total cost of actual production= (90 units* 100 per unit total cost) = 9,000 Variances Direct material price Direct material usage Direct labour rate Direct labour efficiency Variable overhead expenditure Variable overhead efficiency Fixed overhead expenditure Fixed overhead efficiency Total Variances So, Actual total cost= (9000-300) = 8700 [p13] n. Report findings to management in accordance with identified responsibilities centres: The Responsibility is the unit in the organization that has control over costs, revenues, or investment funds. Lowest organizational level at which funds control functions are carried out. Generally the same as divisions in an operating component. For accounting purposes, responsibility centers have four classifications: Cost Centers: Part of a business to which a cost is allocated for the purposes of strategic planning. Cost centers can be large divisions of a business, departments, small teams, or even individuals Revenue Centers: A Revenue Center is responsible for selling an agreed amount of products or services. Its manager is usually responsible to maximize revenue given the selling price (or quantity) and given the budget for personnel and expenses. Profit Centers: Profit Centers are parts of a corporation that directly add to its profit. Managers are held accountable for both revenues, and costs (expenses), and therefore, profits. Usually the different profit centers are separated for accounting purposes so that the 700 (100) (800) 400 (200) 100 200 300

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management can follow how much profit each center makes and compare their relative efficiency and profit. Investment Centers: An investment center is a classification used for business units within an enterprise. The essential element of an investment center is that it is treated as a unit which is measured against its use of capital, as opposed to a cost or profit center, which is measured against raw costs or profits. Incremental Analysis in the Responsibility Center: Incremental analysis is used to find the impact of changes in costs or revenues, given a specific potential scenario. Decisions involving incremental analysis include the following: Make or buy (Profit Center) Sell or process further (Revenue Center) Special order (Cost Center) Changes in production and/or technology (Investment Center) [p14]

Reference: 1. 1. source Cited by Aabir Hussain Jafri . 2010. Class Lecture. London guildhall College . Text books: 1. Horngren, Foster & Datar- Cost Accounting 2. Matz Usry-Cost Accounting Planning & Control 3. Graham Mott, 2008; 7th Edition; Accounting for non- accountants; Kogan Page Limited Available at online: 1.http://www.globusz.com/ebooks/Costing/ 2. www.aat.co.uk 3. Www. Bized.ac.uk http://www.buzzle.com/articles/budgeting/

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