3621 Radu Miclaus Managing Accounting 35531 1486989475

HND Business – Level 4
MANAGEMENT ACCOUNTING:
COSTING BUDGETING
Lecturer: Emmanuel Ofori
Student: Radu Miclaus
Student ID: 11717

HND Business – Level 4 Managing Accounting: C.B.
Table of Contents
Introduction .......................................................................................................................... 1
1. Cost information ............................................................................................................... 2
1.1 Types of cost .............................................................................................................. 2
1.2 Unit cost and total job cost.......................................................................................... 4
1.3 Cost of Exquisite ......................................................................................................... 6
1.4 Cost data techniques. ................................................................................................. 9
2. Methods of costs reduction ............................................................................................ 11
2.1 Prepare and analyse the cost report. ........................................................................ 11
2.2 Key performance indicators. ..................................................................................... 13
2.3 Cost reduction and value and quality enhancement. ................................................ 16
3. Forecasts and budgets. ................................................................................................. 17
3.1 Purpose and nature of budgeting process ................................................................ 17
3.2 Budgeting methods ................................................................................................... 19
3.3 Production and materials purchase budget .............................................................. 22
3.4 Set up cash budget ................................................................................................... 24
4. Performance – budgets monitoring ................................................................................ 27
4.1 Variances, causes and remedial actions. ................................................................. 27
4.2 Operating statement preparation .............................................................................. 29
4.3 Reporting findings to management ........................................................................... 30
References ........................................................................................................................ 31
Introduction
Management accounting is the application of the principles of accounting and financial

management to produce, keep, preserve and growth value for the stakeholders of for-profit
and not-for-profit organisations in the public and private sectors (Eaton, 2005).
Management accounting is an efficient activity concerning the collection, recording, storage,
and summary of both financial and non-financial data and the communication of information
to interested parties mainly within an entity (Lecturer's Notes, 2015).
Its main purpose is to supply accounting information for use within a business but that
information might also be of interest to external parties such as banks, credit rating
agencies and the government.
The general role of management accountancy is to offer information for management
purposes. Eight specific functions can be acknowledged: planning, control, cost accounting,
decision making, financial management, auditing, motivation, and performance
measurement (Dyson, 2010).
The cost accounting system is typically based on a system of “responsibility accounting”

enclosing the structures in the below table:
(Lecturer's Notes, 2015).
Student ID: 11717 1

1. Cost information
1.1 Types of cost
The cost is the amount of money used to produce or acquire something.

Costs can be categorised in various ways depending on their nature and a specific purpose.
A comprehensive classification for types of cost is shown in the diagram below
Jeffrey and Son’s is a manufacturing company, so by function they are incurring production
and non-production costs.
The production costs are those incurred when raw materials are transformed into completed
and part-completed products.
The classification of production costs has the following structure:
Student ID: 11717 2

Materials and labour are obvious, however examples of overhead expenses are rent, utilities,
advertising, direct expenses are transportation, wages, insurance, etc.
Non-production costs are costs not directly related with the production processes in a
manufacturing business.
The non-production costs are classified as below:
By element, Jeffrey and Son’s are having material costs for buying raw materials, labour costs
for paying the employees to manufacture the goods and expenses incurred to produce the
goods (Lecturer's Notes, 2015).
By nature the costs are direct and indirect. Direct costs are those directly identified with the
production of Exquisite and are comprised of direct materials, direct labour and direct
expenses. The indirect are the costs which cannot be directly identified with the production of
Exquisite and they include indirect materials (maintenance tools), indirect labour (a
supervisor) and indirect expenses (insurance) (Lecturer's Notes, 2015).
The behaviour costs are classified in fixed and variable. The fixed cost is incurred for an
accounting period, and which, within definite activity levels remains constant. Examples of
fixed costs are: amortisation, depreciation, interest, etc.
Variable costs incline to fluctuate in total with the level of activity. As activity levels increase
then total variable costs will also increase. Examples of variable costs include direct materials,
supplies, etc. (Lecturer's Notes, 2015).
Student ID: 11717 3

1.2 Unit cost and total job cost.
Job costing it is used when a customer orders a specific job to be done. Each job is valued
independently and each job is distinctive.
The core purpose of job costing is to find the costs related with completing the order and to
record them carefully.
Each job is
unique
Produce a
cost card
for each
job.
Use the same

principles of
costing
(Lecturer's Notes, 2015)
To calculate the costs of a job the following elements must be included:
Direct materials ?
Direct labour ?
Direct expenses ?
Overheads absorbed ?
______________________________
TOTAL COST ??
Using the above formula the unit cost and total job cost for the Job 444 of Jeffrey and Son’s
Ltd are:
Direct materials = 50kg X £4/kg = £200

Direct labour = 30 hours X £9/hour = £270
Variable production overhead = 30 hours X £6/direct labour hour = £180
Fixed overheads = £80000/20000 budgeted direct labour hours X 30 hours = £120
TOTAL JOB COST = £770
UNIT COST = £770/200 units = £3.85
Student ID: 11717 4

The total job cost and the unit cost will be recorded by Jeffrey and Son’s for the purpose of
accounting. To the unit cost Jeffrey and Son’s will add the margin in order to have the selling
price. The difference between selling price and unit cost is the gross profit.
Student ID: 11717 5

1.3 Cost of Exquisite
In order to calculate the cost of Exquisite we need to calculate the overheads for the
production and services departments.
# Overheads Basis Total Production Services
£
Machine Machine Assembly Store Maintena
X Y nce
1. Indirect Allocated 362,000 100,000 99,500 92,500 10,000 60,000

wages and
supervision
2. Indirect Allocated 253,000 100,000 100,000 40,000 4,000 9,000

materials
3. Light and Area 50,000 10,000 5,000 15,000 15,000 5,000

Heating
4. Rent Area 100,000 20,000 10,000 30,000 30,000 10,000
5. Insurance of Book 15,000 7,950 4,965 990 495 600

machinery value of
machinery
6. Depreciation Book 150,000 79,500 49,650 9,900 4,950 6,000

of machinery value of
machinery
7. Insurance of Area 25,000 5,000 2,500 7,500 7,500 2,500

buildings
8. Salaries of Number of 80,000 24,000 16,000 24,000 8,000 8,000

work employees
management
9. Total 1,035,000 346,450 287,615 219,890 79,945 101,100
10. Services 88,500.5 62,331 30,213.5
11. Total revised 434,950.5 349,946 250,103.5
Student ID: 11717 6

The overheads which are not allocated are calculated for each department in connection with
the area occupied, book value of the machinery and number of employees.
Total area occupied is 50,000 square meters. Each department has a different area so
overheads based on area will be apportioned according to the % of that area from the total
area.
Same method will be used for overheads based on book value of machinery and number of
employees.
Machine shop X area is 10,000 m2 which represents 20% of total area

(100000/50000*100=20). The total costs of light and heating are £50,000, so the cost
apportioned for Machine shop X is £50,000 X 20% = 10,000.
Identical calculations are made for all the other non-allocated overheads and are in the table
above.
Reapportioning Maintenance overheads to Production departments is done by taking in

consideration the amount of time spent on the maintenance in those departments and the
Store overheads are reapportioned according to the value of materials issued to production.
There were a total of 25000 hours spent on maintenance work in the Production departments,
each three of them having different hours:
X = 12,000
Y = 8,000
A = 5,000
In % this means for X we have 12,000/25,000*100 = 48%
Y = 32%
A = 20%
The maintenance overheads will be reapportioned in the above percentages to the Production
departments.
Total maintenance overheads are £101,100, so for X we reapportion 101,100*48% = 48,528,
for Y = 32,352 and for A = 20,220.
Following the same rationale for Store using materials cost issued we have the below results:
Total materials = £800,000, and total Store overheads = £79,945
X = 400,000 = 50%. Reapportioning = £39,972.5
Y = 300,000 = 37.5%. Reapportioning = £29,979
A = 100,000 = 12.5%. Reapportioning = £9,993.5
To calculate the overhead absorption rate (OAR) using direct machine hours we use the
formula:
OAR = budgeted fixed overheads/budgeted level of activity
Budgeted fixed overheads are taken from row 11 in the table and budgeted level of activity
(direct machine hours) are given in the case study.
OAR X = 434,950.5/80,000 = 5.44

OAR Y = 349,946/60,000 = 5.83
OAR A = 250,103.5/10,000 = 25.01
Student ID: 11717 7

For production of 100,000 are
Materials costs for the production of 100,000 units are £8 X 100,000 = £800,000
Labour costs for production of 100,000 units are £15 X 100,000 = £1,500,000
The total cost of production and the cost per unit of Exquisite product using machine hours is
shown in the table below:
Product: Exquisite £
Materials 800,000
Labour 1,500,000
Fixed cost (by machine hours)
Machine X 80,000 x 5.44 435,200
Machine Y 60,000 x 5.83 349,800
Assembly A 10,000 x 25.01 250,100
Total cost of production 3,335,100
Number of Exquisite 100,000
Cost per unit of Exquisite 33,35
Student ID: 11717 8

1.4 Cost data techniques.
According to the Financial Director of Jeffrey and Sons, the company should absorb the
overheads on the basis of direct labour hours and not machine hours.
Overhead rate absorption rates on the basis of direct labour hours are:
OAR X = 434,950.5/200,000 = 2.17

OAR Y = 349,946/150,000 = 2.33
OAR A = 250,103.5/200,000 = 1.25
Actual labour hours are:

Machine X = 200,000
Machine Y = 150,000
Assembly A = 100,000
The total cost of production and the cost per unit of Exquisite product using direct labour hours
is shown in the table below:
Product: Exquisite £
Materials (direct + indirect) 800,000
Labour (direct + indirect) 4,567,000
Fixed cost (by labour hours)
Machine X 200,000 x 2.17 434,000
Machine Y 150,000 x 2.33 349,500
Assembly A 100,000 x 1.25 125,000
Total cost of production 3,208,500
Number of Exquisite 100,000
Cost per unit of Exquisite 32,08
Student ID: 11717 9

From the two methods used to calculate the Exquisite product cost/unit it results that when
direct labour is used instead of machine hours the cost of the unit is smaller so the Financial
Director of Jeffrey and Sons is right to ask that overheads shall be absorbed based on direct
labour hours.
Student ID: 11717 10

2. Methods of costs reduction
2.1 Prepare and analyse the cost report.
Calculations:
Actual Materials Cost

Materials = £12/unit
Actual units = 1900
Materials total cost = 1900 X £12 = £22800
Actual Labour Cost

Labour = £10/unit
Actual units = 1900
Labour total cost = 1900 X £10 = £19000
Actual Fixed Overheads

Fixed overheads are constant regardless of the number of units manufactured.
Actual Electricity Cost

High total cost – Low total cost 8000 – 5000 3000
Variable cost/unit = = = = £3.75/unit
High actual units – Low actual units 2000 – 1200 800
Variable total cost = 1900 X £3.75 = £7125

Fixed cost is calculated substituting at high level activity = High total cost – (High actual units
X cost/unit) = 8000 – (2000 X 3.75) = 8000 – 7500 = £500
Actual electricity costs = £7125 + £500 = £7625
Actual Maintenance Cost

Maintenance cost is increasing with £1000 for each 500 units. There are 1900 units
manufactured. The cost of maintenance is (1900 X 1000) / 500 = £3800.

Budgeted Actual cost Variance Interpretation
cost
2000 units 1900 units (100) Negative
Material £24,000 £22800 £1200 Positive
Labour £18,000 £19000 (£1000) Negative
Fixed overheads £15,000 £15000 0 Neutral
Electricity £8,000 £7625 £375 Positive
Maintenance £5,000 £3800 £1200 Positive
Total £70,000 £68225 £1375 Positive
From the table above the first conclusion is that the production of units and labour costs are
negative. Jeffrey and Sons has budgeted to produce 2000 units but actually only 1900 were
manufactured. There are more than one reasons why this happen: bad management in
production department, not enough qualified staff, lazy or unmotivated staff, broken down
equipment and tools.
The negative labour costs variance can be due to an increased volume of overtime working
hours and increased volume of paid sickness time off.
The company needs to make sure they have competent supervisors in the production
department, enough qualified and motivated staff and have reliable equipment and tools. Also
they need to make sure that the work is done in normal time and the overtime and sickness
benefits are not abused.
All other variances are positive which shows that Jeffrey and Sons has a firm hand on keeping
costs at or under the budgeted levels.

2.2 Key performance indicators.
Key Performance Indicators (KPI), support an organisation outline and measure growth
toward organisational objectives.
After an organisation has considered its mission, acknowledged all its stakeholders, and
defined its objectives, it needs a way to measure progress toward these objectives. Key
Performance Indicators are these tools.
KPI’s are countable measurements, approved in advance, that mirror the critical success
factors of an organisation. They will vary depending on the organisation.
Whichever KPI are designated, they have to reflect the organisation's objectives, they need
to be key to its achievement and they must be measurable. Key Performance Indicators are
usually long-term reflexions. They do not change often. The objectives for a particular KPI
may change as the organisation's objectives change, or as it becomes closer to
accomplishing an objective (Reh, 2015).
Key Performance Indicators are organised in the following categories:

• Quantitative indicators - represented with a number.
• Qualitative indicators - cannot be represented with a number.
• Leading indicators - predict the outcome of a process
• Lagging indicators - represent success or failure
• Input indicators - measure the amount of resources spent during the generation of
the outcome
• Process indicators - represent the efficiency or the productivity of the process
• Output indicators - reflect the outcome or results of the process activities
• Practical indicators - interface with existing company processes.
• Directional indicators – are specifying whether or not an organization is getting
better.
• Financial indicators - used in performance measurement (Lecturer's Notes, 2015).
In the 1990’s Norton and Kaplan have developed an approach for measuring an
organisation’s performance called Balance Scorecard. Their method added non-financial
performance measures to the existing financial ones. The balance scorecard identifies four
perspectives from which to analyse an organisation:
- learning and growth
- business process

- customer
- financial
The balanced scorecard has developed from its primary use as a unpretentious performance
measurement framework to a full strategic planning and management system.
It provides a framework that not only offers performance measurements, but helps planners
identify what should be done and measured (Lecturer's Notes, 2015)
In the case study of Jeffrey and Son’s the following KPIs are identified:
Profit indicators are helping Jeffrey and Son’s to understand how successful they are in
generating high return. Gross and net profit have to be analysed. As in the period analysed
Jeffrey and Son’s produced 1900 units instead of 2000 planned it means that the profit will
not be as expected and measures has to be taken.
Cost indicator is used to manage and reduce costs. Jeffrey and Son can use this indicator as
their costs are high for the number of units produced. Even the indirect costs are under the
budgeted figures, they are higher than it shall be for the 1900 units produced.
Employee turnover rate shall be an important indicator for Jeffrey and Son as their cost of
labour is over the budget and the number of units produced is less than planned. If too big,
the reasons for it must be analysed and problems solved.
Employee satisfaction is an indicator which trough employee surveys can give to Jeffrey and
Son a clear view if the reasons for underproduction and high labour costs are related to staff
unhappiness.
How often a new product is launched is an indicator if Jeffrey and Son are an innovative
company. The more often a product is launched, the more innovative will they be considered
and that will reflect in higher interest for their products.
Percentage of defect products indicator is calculated by dividing the number of defective units
to the total number produced. If this indicator is low will show to Jeffrey and Sons that their
products are properly manufactured and costs are kept at low level.
Number of customers, either gaining or losing them, can be used by Jeffrey and Son to
understand if they are meeting or not the customer needs and expectations.

Customer satisfaction and retention indicator shall be used by Jeffrey and Son to measure
how many customers are making repeat purchases, if they are happy with the products and
with the price/quality report. Also the number of complaints it will be a good indicator of
company’s performance, the fewer complaints the better.
All the above indicators will help Jeffrey and Son to increase their profit, reduces costs and
improve in areas such product quality, human resources management and customer
satisfaction.

2.3 Cost reduction and value and quality enhancement.
Cost reduction is a real and permanent reduction in the unit cost of the goods produced or
services carried out.
Cost reduction can be made in one the following ways:
Reduction in unit cost of production - usually done by elimination of inefficient and non-
essential elements in the design of products and from techniques and practices carried out.
Increasing productivity – increasing the number of units manufactured with the same
expenses without compromising on quality.
There are many cost reduction techniques, several of them being described below:
Target costing is the maximum amount of cost that can be implemented on a product and
with it the organisation can still make the required profit margin from that product at a specific
selling price.
Value engineering is an efficient technique for reducing costs, increasing productivity, and
improving quality.
Activity based cost management is a technique which considers that consuming activities
are causing unnecessary costs. It manages the activities causing costs and not the costs.
Just in time is a method aimed at producing the necessary items, at the necessary quality
and in required quantities at the very moment when they are needed.
Total quality management implies that all functions of a business are involved in a
uninterrupted process of quality enhancement. It reduces costs by manufacturing the
products correctly the first time, in this way reducing costs incurred by additional work on
substandard items (Lecturer's Notes, 2015).
Cost reduction is a planned process and has a corrective function.

There is also a non-conventional approach to cost reduction which uses the following
methods: material cost, manpower cost, cost management initiatives, funding cost (Lecturer's
Notes, 2015).
In the case study of Jeffrey and Son’s there are a number of ways to reduce costs. Some of
them are explained below.
1. Moving to a smaller production unit to reduce rent and overhead expenses. This shall be
achieved if the production space is too big and has areas which are having no utility.
2. Increase volume of production as the fixed costs will stay the same but sales will grow.
3. Change suppliers or renegotiate contracts in order to get cheaper prices, however attention
must be paid to not compromise quality.
4. Reduce overhead costs by using the utilities more efficiently in the production process.
5. Producing quality items, without the need to re-inspect and repair them. This will eliminate
the costs associated with these extra activities.
6. Replace old machinery and equipment, they produce less and consume more.
7. The production design can be modified by eliminating features which are not needed
without affecting quality.
8. Produce the exact number of items at the required quality at the moment they are ordered
and deliver them by the deadline.
9. Reduce marketing and advertising costs by executing a control over these activities and
use cheaper options like social media.
10. Reduce the number of employees from bureaucracy, but again make sure the quality of
production is not affected. This will reduce the indirect costs.
The costs reduction methods recommended to Jeffrey and Son will increase their profit,
reduce selling price, attract more customers and retain them.

3. Forecasts and budgets.
3.1 Purpose and nature of budgeting process
A budget is an estimate of projected income and expenses for a future period of time and
evaluates the various targets established by an entity's management (Hansen, Mowen and
Guan, 2009).
The budget of an organisation includes a forecast profit and loss account, balance sheet,
accounting ratios and cash flow statements which are regularly analysed to facilitate control
In general the purposes of a budget are to forecast profitability (income and expenses), to
help managers making decisions and observe the organisation’s performance. In more
details, the purposes of the budgeting process are the following:
Planning – is an essential element for the development of an organisation as it stops
managers to convey on makeshift planning. Jeffrey and Son will forecast their income and
expenses according to sales trends over a past period of time. Also they will forecast the staff
needed.
Control – is a tool to compare actual results with the budgeted one and take action
accordingly. Jeffery and Son will assess their results against the budget on a monthly basis
make appropriate decisions and corrections if needed.
Communication – is an element that allows all levels of management to confer. From the
owners of Jeffrey and Son to senior managers to junior managers they will have discussions
related to the targets and measures to be taken.
Coordination – through it all parts of an organisation are moving towards the business
targets. All departments of Jeffrey and Son have to work together towards the same goal to
make the company as profitable as possible and develop it further.
Evaluation – is used to evaluate the actions of managers in terms of the costs and incomes
they are controlling. At Jeffrey and Son each manager will be evaluated constantly against
the income and expenses figures budgeted for their department so they can know at all time
how their department is performing and what measures to take.
Motivation – has the purpose to make managers to stay in or lower the budgeted levels of
expenses by being rewarded. All managers, be them senior or junior, in Jeffrey and Son Ltd.
will be motivated with various rewards when their department are in or have lower levels of
budgeted expenditure. Conversely, if the department have over the budget expenses the
managers can be penalised.
Authorisation - the budget authorise managers to take decisions regarding expenses,
employment and ensuing plans enclosed in the budget. Jeffrey and Son managers will have
the power to hire staff according to their objective needs, to authorise expenses needed for
the well-functioning of the department and carry on other plans included in the company’s
budget.
Delegation – this allows managers to be involved in the budget setting which may stimulate
them and also leading to more realistic targets. The managers of Jeffery and Son will be
involved in the process of budgeting for the future in order to have a first-hand input from
specialists, to give them credibility and confidence and also to make sure the budget figures
are realistic and not over or under estimated (Lecturer's Notes, 2015).
The budget procedure starts by establishing the organisation’s objectives. These may include
increasing profit, create and maintain better relations with customers, or to improve the
working conditions of employees. The next stage is to draw detailed plans beginning with the
forecast. A forecast is an extrapolation of what is likely to happen, while a budget is a careful
prepared plan of what should happen (Lecturer's Notes, 2015).

Jeffrey and Son are a private limited company and its activities are in the manufacturing
industry. Being a private limited company their main purpose is to make profit so the budget
will focus on elements like maximising the profit by increasing sales and reducing costs,
maximising shareholders’ dividends, expanding the business by opening new branches and
developing more products. All these elements will decide the budgeting decisions which
Jeffrey and Son will make.
The budgetary process for Jeffrey and Son will be as below:
1. Sales Budget it is the first budget they have to set up as being a private limited company it
is very important for them to have a clear idea what income to expect.
2. Production Budget is set up right after the sales as Jeffrey and Son needs to know how
much they need to produce in order to achieve the sales target.
3. Materials Purchase Budget is next element as after establishing the number of items
needed to be manufactured, materials are needed to be purchased.
4. Direct Labour Cost Budget is calculated so Jeffrey and Son will know how many hours of
labour will be needed in order to produce the number of units in the production budget with
the materials purchased.
5. Overheads Budget – Jeffrey and Son will budget next all other costs necessary for
production other than materials and direct labour.
6. Selling and Distribution Budget – next, Jeffrey and Son have to establish the selling and
distribution budget which includes advertising and marketing of the products manufactured
and budgeted and the distribution cost associated to deliver the items to buyers.
7. Administration Budget – refers to the costs associated with all other non-manufacturing,
sales and marketing departments of Jeffrey and Son. It has a significate size and Jeffrey and
Son must give to it an important attention.
8. Cash Budget – Jeffrey and Son has to make certain that its operations will provide enough
cash to meet planned cash requirements. If not, additional cash sources must be find.

3.2 Budgeting methods
There are several budgeting methods used when in the setting up of a budget. A specific
method can be suitable for one or more types of organisations (manufacturing, public sector,
services, not for profit, etc.).
The different budgeting methods are:
o Top down budgeting
o Bottom up budgeting
o Zero based budgeting
o Periodic Budgeting
o Incremental budgeting
o Rolling budgets
o Feed forward control
o Activity based budgeting
Each organisation will choose the budgeting method most appropriate for their nature (Shim,
Siegel and Shim, 2012).
A short description of each budgeting method is given below.
Top down budget - set by the top management without the input of bottom level of users.
They show the performance goals and beliefs of senior managers, but can be impractical
because they do not integrate the input of people who implement them.
Bottom up budgeting – is a method in which lower level managers and supervisors prepare
the budgets and then send them to the top management for evaluation and approval. These
budgets incline to be more precise and will have a positive effect on staff morale because
they take on board an active part in the budgeting process.
Zero based budgeting – the expenses proposed for a specific period of time are starting
from zero as like they were never been performed before. By starting from zero at each budget
cycle, it is necessary that managers will take a close look at expenses and justify thus
diminishing waste.
Periodic Budgeting - is a budget for a certain time period, usually the financial year. The
budget is not changed or revised during the year, and it is a fixed budget. When used, an
essential statement is that incomes and expenses within the period should be predictable and
that it is unlikely that any unexpected events will occur that will make the budget unrealistic.
Incremental budgeting - it starts with the previous period’s budget and adds (or subtracts)
an incremental amount to cover inflation and other known changes. It is suitable for stable
organisations (e.g. public sector), where costs are not likely to change considerably.
Rolling budgets – it is a budget kept constantly up to date by adding another accounting
period when the earliest accounting period (usually a year) has expired. Appropriate if precise
forecasts cannot be made. Examples, include a fast pacing environment or for any area of
business that needs strict control.
Feed forward control - provides a comparison between budgeted results and actual results.
Control information is constructed on comparison with a revised latest forecast of what is
expected to happen in the budget year. Feed-forward control involves a comparison between
a revised up-to-date forecast and the original budget.
Activity based budgeting – is a method of budgeting centred on an activity structure and
using cost driver data and variance feedback processes. It is the use of overhead costs
established by using activity based costing as a foundation for preparing budgets (Lecturer's
Notes, 2015).
The nature Jeffrey and Son business it is a manufacturing private company. For them the
following methods of budgeting can be considered: top down, bottom up, rolling, activity
based.

For Jeffrey and Son the top down method will give management the advantage of having
ample financial control over the budget, employees working with the budget will have bigger
responsibility and the process is faster as the input comes only from decision makers.
Disadvantages for Jeffrey and Son can include incorrect forecasting as top level management
have less understanding of the needs of departments then the people who are actually
running them. There is a real danger for underperformance as departments who consider
they got less money will not perform at their best. Also these departments may spend all the
money regardless if they need or not to avoid getting less funding in the next budget. Lower
level of management and other staff can underperform as they feel their input in the process
is not appreciated.
The bottom up method can bring Jeffrey and Son the following advantages: encourages
participation from their departments’ mangers and staff using their knowledge and they will
easier stay within the budget after is applied. This will lead to a better motivation of Jeffrey
and Son employees resulting in higher performance. Being prepared by staff and department
managers of Jeffrey and Son bottom down budgets will be accurate as they are set up by
people who have better knowledge and expertise of their department then the top
management. Last but not the least the method provides for Jeffrey and Son a channel of
communication and better coordination between department managers and top level
management.
Disadvantages which Jeffrey and Son can face with the bottom up method involve a longer
amount of time needed to create budgets as each department must create its own and these
has to be revised and approved by top management, possible creating a back and forth
feedback delaying the process. Department managers of Jeffrey and Son can misrepresent
figures in the budget (usually overestimating them) which can result in unrealistic budget and
overspending. Another disadvantage for Jeffrey and Son can appear from the fact that
department managers although they have the skills and expertise to run their department they
do not have enough knowledge in the budgeting matters or financial source allocation.
A rolling budget will present for Jeffrey and Son the advantage of flexibility as it includes
changes from the previous period of time into the next period so the budget is up to date
continuously and doesn’t need extensive time and money for setting up. Jeffrey and Son will
react earlier to changes in circumstances and asses performance based on objectives
adjusted with the environment.
For Jeffrey and Son a disadvantage of a rolling budget is that they will have to continuously
gather information from the previous period of time which needs to be extracted by skilled
staff. These revisions can distract Jeffrey and Son employees from their regular duties.
If the conditions are not continuously changing Jeffrey and Son shall not use rolling budgets
as this will result in a waste of time and resources. If Jeffrey and Son will assess employees
based on rolling budgets they may put a greater pressure on them and become less
motivated. Jeffrey and Son may become focused on short term objectives and abuse
micromanagement.
If using an activity based budgeting method, Jeffrey and Son have the advantage of seeing
unusual costs for overhead activities. In this situation they can better control the causes, take
action and make managerial decisions.
For Jeffrey and Son the activity based method will work better when they are using the total
quality management cost reduction technique.
For Jeffrey and Son a disadvantage can be greater extent of time and effort will be needed to
establish the strategic activities, their costs factors and individual responsibilities for these
activities.

From the four budgeting methods which Jeffrey and Son can implement it is recommended
that bottom up method to be used. Being a manufacturing business Jeffrey and Son will have
a very accurate budget prepared by departments’ managers and staff who have good
knowledge and expertise of the activities and can set up clear costs estimates. Jeffrey and
Son employees’ morale and motivation will be at high levels improving performance and
productivity. In today’s highly competitive environment Jeffery and Sons needs to keep down
costs and have dedicated staff in order to be a successful business so the bottom up
budgeting method can deliver that.

3.3 Production and materials purchase budget
Production Budget in Units
July
Stock at the end of the month is 15% of the sales of following month
August expected sale = 90,000 units
90,000 x 15% = 13,500 units
Stock at start of July = 11,000 (given in the scenario)
August
Stock at start of month = 13,500

Stock at end of month = 105,000 x 15 = 15,750
September

Stock at end of month = 110,000 x 15% = 16,500, 110,000 being estimated sales for October
July August September

Sales 105,000 90,000 105,000
Less: Opening Stock 11,000 13,500 15,750
Add: Closing Stock 13,500 15,750 16,500
Production Quantities 107,500 92,250 105,750
From the table above we have a production budget of 107,500 units for July, 92,250 units for
August and 105,750 units for September.
Materials Purchase Budget
To calculate the material purchase we have to also calculate the material usage budget.
Material usage = Production quantity x Weight/unit

Production Quantities 107,500 92,250 105,750
Weight/unit (Kg) 2 2 2
Material usage (Kg) 215,000 184,500 215,000
July
Material need for production = 215,000 Kg

Production requirements are to have a stock at the end of month equal with 25% of the
following month production.
Stock at start of July is 52,000 kg (given in scenario)
Stock at end of month = 184,500 x 25% = 46,125
August
Material need for production = 184,500

September
Material need for production = 215,000

Material usage October = 217,000

Material usage (kg) 215,000 184,500 215,000
Less: Opening stock 52,000 46,125 52,875
Add: Closing stock 46,125 52,875 54,250
Material to purchase (kg) 209,125 191,250 212,875
Cost/kg (£) 1.75 1.75 1.75
Materials purchases (£) 365,969 334,687 372,531
From the table above we have materials purchase budget of £365,969 in July, 334,687 in
August and 372,531 in September.
The production budget is the second budget which Jeffrey and Son has to set up in the
budgeting process and the materials budget is the third one of the process.

3.4 Set up cash budget
Cash Budget
In order to calculate the cash budget other budgets have to be calculated first.
Sales Budget
Sales Budget July August September October

Units Sales 105,000 90,000 105,000 110,000
Selling Price (£) 9 9 9 9
Total (£) 945,000 810,000 945,000 990,000
Labour Budget
Labour Costs = Production Quantities x Cost/Unit
July: Labour Costs = 107,500 x 3, 00 = 322,500

August: Labour Costs = 92,250 x 3, 00 = 276,750
September: Labour Costs = 105,750 x 3, 00 = 317,250
Variable Overheads Budget
Variable overheads/unit = £1, 00

Variable overheads paid 60% in the incurred month and 40% in the next month
In July the variable overheads paid for June = £46,000
Variable overheads payment = Units Sales x Variable cost/unit x 60%
July = 105,000 x 1 x 60% = 63,000

August = 90,000 x 1 x 60% = 54,000
September = 105,000 x 1 x 60% = 63,000

June 46,000
July 63,000 42,000
August 54,000 36,000
September 63,000
Total 109,000 96,000 99,000
Fixed Overheads
Each month fixed overheads = £100,000

Fixed overheads include £12,500 depreciation paid one month after the costs are incurred.
July opening fixed overheads = £75,000
August fixed overheads = 100,000 – 12,500 = 87,500
September fixed overheads = 100,000 – 12,500 = 87,500

Cash Income from Sales
Cash is received 60% in the month of sale, 25% in the following month and 10% two months
after the sale. The remaining 5% is written off in the month of sale as bad debt.
Selling price = £9/unit

May actual sales = 95,000 units x 9 = £855,000
June actual sales = 110,000 units x 9 = £990,000
July Cash Income = 10% of May sales + 25 % June sales + 60% July sales = (10% x 855000)
+ (25% x 990000) + (60% x 945000) = 85500 + 247500 + 567000 = £900,000
Following an identical rationale we have:
August Cash Income = £821,250

September Cash Income = £864,000
Total Sales (£) July(£) August (£) September (£)

May 855,000 85,500
June 990,000 247,500 99,000
July 945,000 567,000 236,250 94,500
August 810,000 486,000 202,500
September 945,000 567,000
Total 900,000 821,250 864,000
Considering all the budgets calculations the cash budget is presented in the table below:
Cash Budget

Opening Cash Balance (£) 16,000 43,531 69,844
Cash Income (£) 900,000 821,250 864,000
Total Cash Available (£) 916,000 864,781 933,844
Cash Payments (£)
Materials purchases (£) 365,969 334,687 372,531
Labour Costs (£) 322,500 276,750 317,250
Variable Overheads (£) 109,000 96,000 99,000
Fixed overheads (£) 75,000 87,500 87,500
Total Cash Paid (£) 872,469 794,937 876,281
Closing Cash Balance (£) 43,531 69,844 57,563

The closing cash balance for September is £57,563 which shows that Jeffrey and Son has
sufficient money for day to day operations and that it can still extend credit facilities to its
customers without having problems. However caution has to be considered as in September
cash payments were bigger than cash revenue and the positive closing balance was due to
the closing cash balance in August.

4. Performance – budgets monitoring
4.1 Variances, causes and remedial actions.
Variance analysis is a methodical tool used to compare actual operations to budgeted

estimates. When the accounting period is over, actual costs and sales figures are compared
with the budgeted ones (My Accounting Course, 2014).
The results of variance analysis can be positive and then they are called favourable (F) or
can be negative, calling them adverse (A).
There several variances which can be analysed: sales, materials, labour, variable and fixed
overheads.
From the data in the case study of Jeffrey and Son the following variances can be calculated:
Sales Variances
The planned sales budget was 4000 units selling at £4/unit, making a total of £16,000.
Actual sales revenue were 3500 units sold at £13,820, resulting in price/unit of £3,95.
Sales Price Variance = (Budgeted sales price/unit – Actual sales price/unit) x Actual quantity
sold = (4 – 3,95) x 3500 = 0,05 x 3500 = 175
Sales Volume Variance = (Budgeted sales units - Actual sales units) x Standard
contribution/unit. Standard contribution/unit is difference between selling price and variable
cost/unit = 4 - 2,4 = 1,6.
Sales Volume Variance = (4000 – 3500) x 1,6 = 800 (Lecturer's Notes, 2015).
Jeffrey and Son have an adverse variance in the sales budget which is due to the fact that
less units (3500) were sold then budgeted (4000) and at a lower price/unit, £3,95, instead of
£4, possible due to the competitive nature of the market. Jeffrey and Son have to improve the
marketing and sales department performance, to introduce new and more efficient marketing,
sales and price negotiation techniques to grow the sales income (Lecturer's Notes, 2015).
Materials Variance
In this category there are two elements, material usage variance and material price variance.
Budgeted material used = 4000 units x 0,4 kg = 1600 kg

Actual material used = 1425 kg for 3500 units.
Actual material cost = £3420 (for 1425 kg)
Standard price/kg = £2,40
Actual price/kg = £2, 40
Material price variance = (Actual material used x Standard price/kg) – (Actual material used
x Actual price/kg) = (1425 x 2,40) – (1425 x 2.40) = 3420 -3420 = 0
Material usage variance = (Actual material used x Actual price/kg) – (Standard material used
x Standard price/kg) = (1425 x 2,40) – (1400 x 2,40) = 3420 – 3360 = 60
Materials Units Used Price (£) Usage Variance (£) Variance Type
(kg) P U P U
Budgeted 4000 1600 3420 3360
Actual 3500 1425 3420 3420 0 60 F A

Jeffery and Son have an adverse material usage variance of £60. This could be caused by
material wastage during the manufacturing process, using old machines in the manufacturing
process or because of lower quality material. Material wastage at Jeffrey and Son can be
eliminated by using total quality management in the manufacturing process, to replace old
machinery with new ones and to train their staff if there are not skilled enough. If the material
is of lower quality then Jeffrey and Son should change the supplier.
Labour Variance
Standard rate = £8/hour

Actual rate = £2690/345h =£7,8/hour
Labour Rate Variance = (Actual Hours Paid x Standard Rate) – (Actual Hours Paid x Actual
Rate) = (345 x 8) – (345 x 7,8) = 2760 – 2690 = 70
Labour Efficiency Variance = (Actual Production in Standard Hours x Standard Rate) – (Actual
Hours Worked x Standard Rate) = (3500 x 0,1 x 8) – (345 x 8) = 2800 – 2760 = 40
Labour Hours x Rate Efficiency Variance Variance Type

R E R E
Budgeted 2760 2800
Actual 2690 2760 70 40 F F
Jeffrey and Son have favourable labour rate variance of 70 and favourable labour efficiency
variance of 40. The favourable rate variance shows that Jeffrey and Son have paid less than
expected for labour. The favourable efficiency variance shows that Jeffrey and Son used less
labour than expected and it has skilled labour force.
Fixed Overhead Variance
Fixed overhead variance is calculated by subtracting the actual fixed overheads from the
budgeted fixed overheads.
Budgeted fixed overhead = £4800

Actual fixed overhead = £4900
Fixed Overheads Value (£) Variance (£) Variance Type

Budgeted 4800
Actual 4900 100 A
Jeffrey and Son have an adverse fixed overhead variance of £100. That means the rent went
up or there was an increase in the managers and supervisors salaries. To have favourable
fixed overhead variance Jeffery and Son should renegotiate the rent or reallocate and to
reduce the number of non-productive staff.

4.2 Operating statement preparation
Budgeted materials = 4000 units x 0,4 kg x £2,40 = £3840

Total budgeted hours of labour = 4000 units x 6 minutes/unit = 4000 units x 0,1 hours = 400
hours
Budgeted labour = 400 hours x £8 = £3200
Budgeted profit = Budgeted sales income - (Budgeted material + Budgeted labour + Budgeted
fixed overheads) = 16,000 – (3840 + 3200 + 4800) = £4160
The operating statement of Jeffrey and Son is show below
Favourable Adverse
Sales Volume Variance 800
Sales Price Variance 175
Material Price Variance
0
Material Usage Variance 60
Labour Rate Variance
70
Labour Efficiency Variance
40
Fixed Overheads Variance 100
Total Net Variance 110 (F) 1135 (A) (1245)
Budgeted operating profit 4160

Less: Total Net Variance (1245)
Actual Operating Profit 2915
The operating statement shows that Jeffrey and Son have an operating profit of £2915.
Having a profit means that shareholders of Jeffrey and Son can get dividends. From the
statement the management of Jeffrey and Son can see the trends in sales and costs and take
appropriate decisions. Also as the statement shows profit, Jeffery and Son can look for
sources of finance with confidence having greater credibility.

4.3 Reporting findings to management
From the variances analysis of Jeffrey and Son it results that the sales variances are adverse
due to less units sold the budgeted and at a lower selling price than budgeted. The reasons
are that the market is competitive and the marketing and sales department did not have a
market research and good strategies to advertise and sell the products. Responsibility to
address the situation falls on the management of marketing and sales department.
The materials variances are also adverse and could be caused by material wastage or
employees low skills. If there is wastage that could be because of lower quality material.
Measures to tackle this is to train employees or to change supplier in order to get better quality
materials. Also if the machines are old they need to be replaced with better new ones.
Responsible for implementing the above measures are the human resource department for
training and acquisition department for new machines and change of suppliers.
Jeffrey and Son have a favourable labour variance which is owed to less overtime and higher
skilled labours who worked efficiently. Also the staff could be well motivated which results in
better performance.
Fixed overheads variance is adverse and this can be the result that Jeffrey and Son has paid
an increased rent or have extra staff in non-productive roles. To correct the situation the rent
should be renegotiated or the production unit to be reallocated and the non-productive staff
reduced in number. Responsible for these measures are the managers of Jeffrey and Son
and human resources department.

References
Bizstats.com, (2012). BizStats. [online] Available at: http://www.bizstats.com/reports/sole-
proprietor-labor-costs.php [Accessed 18 Jan. 2016].
Dyson, J. (2010). Accounting for non-accounting students. Harlow, England: Financial Times
Prentice Hall.
Eaton, G. (2005). Management Accounting Official Terminology. 2nd ed. London: CIMA
Publishing.
Hansen, D., Mowen, M. and Guan, L. (2009). Cost management. Mason, Ohio: South-
Western.
Lecturer's Notes, (2015). Budgeting.
Lecturer's Notes, (2015). Cost reduction tehniques.
Lecturer's Notes, (2015). Introduction To Cost Classification.
Lecturer's Notes, (2015). Performance indicators.
Lecturer's Notes, (2015). Standard Costing Variance Analysis.
Lecturer's Notes, (2015). Types of Costing Methods.
My Accounting Course, (2014). Variance Analysis. [online] Available at:
http://www.myaccountingcourse.com/accounting-dictionary/variance-analysis
[Accessed 25 Jan. 2016].
Reh, F. (2015). What You Need to Know About Key Performance Indicators. [online]
About.com Money. Available at:
http://management.about.com/cs/generalmanagement/a/keyperfindic.htm [Accessed
13 Jan. 2016].
Shim, J., Siegel, J. and Shim, A. (2012). Budgeting basics and beyond. 4th ed. Hoboken,
N.J.: Wiley.

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HND Business – Level 4

Lecturer: Emmanuel Ofori

Student: Radu Miclaus

Student ID: 11717

Management accounting is the application of the principles of accounting and financial

The cost accounting system is typically based on a system of “responsibility accounting”

(Lecturer's Notes, 2015).

Student ID: 11717 1

1.1 Types of cost

The cost is the amount of money used to produce or acquire something.

(Lecturer's Notes, 2015).

Student ID: 11717 2

(Lecturer's Notes, 2015).

Student ID: 11717 3

1.2 Unit cost and total job cost.

Use the same

(Lecturer's Notes, 2015)

To calculate the costs of a job the following elements must be included:

Direct materials = 50kg X £4/kg = £200

TOTAL JOB COST = £770

UNIT COST = £770/200 units = £3.85

Student ID: 11717 4

Student ID: 11717 5

1.3 Cost of Exquisite

# Overheads Basis Total Production Services

1. Indirect Allocated 362,000 100,000 99,500 92,500 10,000 60,000

2. Indirect Allocated 253,000 100,000 100,000 40,000 4,000 9,000

3. Light and Area 50,000 10,000 5,000 15,000 15,000 5,000

4. Rent Area 100,000 20,000 10,000 30,000 30,000 10,000

5. Insurance of Book 15,000 7,950 4,965 990 495 600

6. Depreciation Book 150,000 79,500 49,650 9,900 4,950 6,000

7. Insurance of Area 25,000 5,000 2,500 7,500 7,500 2,500

8. Salaries of Number of 80,000 24,000 16,000 24,000 8,000 8,000

9. Total 1,035,000 346,450 287,615 219,890 79,945 101,100

10. Services 88,500.5 62,331 30,213.5

11. Total revised 434,950.5 349,946 250,103.5

Student ID: 11717 6

Machine shop X area is 10,000 m2 which represents 20% of total area

Reapportioning Maintenance overheads to Production departments is done by taking in

OAR = budgeted fixed overheads/budgeted level of activity

OAR X = 434,950.5/80,000 = 5.44

Student ID: 11717 7

Fixed cost (by machine hours)

Machine X 80,000 x 5.44 435,200

Machine Y 60,000 x 5.83 349,800

Assembly A 10,000 x 25.01 250,100

Total cost of production 3,335,100

Number of Exquisite 100,000

Cost per unit of Exquisite 33,35

Student ID: 11717 8

1.4 Cost data techniques.

OAR X = 434,950.5/200,000 = 2.17

Actual labour hours are:

Materials (direct + indirect) 800,000

Labour (direct + indirect) 4,567,000

Fixed cost (by labour hours)

Machine X 200,000 x 2.17 434,000

Machine Y 150,000 x 2.33 349,500

Assembly A 100,000 x 1.25 125,000

Total cost of production 3,208,500

Number of Exquisite 100,000

Cost per unit of Exquisite 32,08

Student ID: 11717 9