ASSIGNMENT 2 FRONT SHEET

Qualification BTEC Level 4 HND Diploma in Business

Unit number and title Unit 5: Management Accounting (489)

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Assignment Brief 2 (RQF)
Higher National Certificate/Diploma in Business
Unit Number and Title Unit 5 - Management Accounting
Academic Year 2020-2021
Unit Assessor
Assignment Title ASSIGNMENT 2 - Examination
Submission Date

Submission Format:

Format

 The test will take 90 minutes and it will be conducted after slot 40.

Unit Learning Outcomes

LO2 Apply a range of management accounting techniques

LO3 Explain the use of planning tools used in management accounting

Exam guidance:

The final exam will test the students a variety of management accounting techniques
including budgeting. Below is a list of possible exercises on the final exam:

 Creating an income statement.

 Behaviour of costs.
 Cost volume profit analysis.
 Cost allocation.
 Absorption and marginal costing.
 Multiproduct breakeven analysis.
 Preparing various types of budget.
 Time value of money
 Capital Investment Appraisal
Unit Assessment Criteria
Learning Outcome Pass Merit Distinction
LO2. Apply a range of P3 Calculate costs M2 Accurately apply
management using appropriate a range of
accounting techniques of management
accounting
techniques cost analysis to
techniques and
prepare an income D2 Produce
produce appropriate
statement using financial reporting financial
marginal and documents. reports that
absorption costs accurately
LO3. Explain the use P4 Explain the M3 Analyze the use apply and interpret
of planning tools used advantages of different planning data for a range of
in management and disadvantages tools and their business activities.
accounting of application for
different types of preparing budgets
planning tools used and forecasts
for budgetary
control

Contents
Assignment Brief 2 (RQF).............................................................................................................................3
Higher National Certificate/Diploma in Business..................................................................................3
 Unit Assessment Criteria..........................................................................................................................4
I. (P3) Explain costs and different type of costs.......................................................................................6
1. What is cost?........................................................................................................................................6
2. Type of costs........................................................................................................................................6
2.1. Manufacturing & Non-manufacturing.........................................................................................6
2.2. Direct & Indirect costs................................................................................................................10
2.3. Fixed – Variable costs.................................................................................................................11
2.4. Opportunity cost........................................................................................................................12
2.5. Sunk costs...................................................................................................................................13
II. (P4) Explain budget and planning tools for budgetary control............................................................13
1. What is Budget?.................................................................................................................................13
2. Distinguish between top-down, bottom-up, and participative budgeting. Give each method's cost
and benefit................................................................................................................................................14
2.1. Top-down budgeting..................................................................................................................14
2.2. Bottom-up budgeting.................................................................................................................15
2.3. Participative budgeting..............................................................................................................16
3. Types of budget.................................................................................................................................18
3.1. Operating budget or master budget..........................................................................................18
3.2. Capital Budget............................................................................................................................19
III. REFERENCES..........................................................................................................................................20
 I. (P3) Explain costs and different type of costs
1. What is cost?
According to Tamplin (2021), the cost is the sacrifice made, which is usually quantified by the resources
given up to attain a specific goal. It is a sacrifice made in exchange for goods or services.

 Expenses are not always costs.

 Some costs are considered assets, while others are considered expenses.
 Expenses have been depleted (used up).

Costs will eventually become expenses.

2. Type of costs
2.1. Manufacturing & Non-manufacturing
2.1.1. Manufacturing
The following is the manufacturing cost formula:

DM + DL + MOH = Manufacturing Costs

As Javed (2021) points out manufacturing expenses can be further classified as follows:

 Direct materials
 Direct labor
 Manufacturing overhead

The three categories of manufacturing costs mentioned above are briefly discussed below:

2.1.1.1. Direct materials & Indirect materials

Javed (2021), direct materials are materials that become an inherent part of the finished product and
can be easily traced back to it. For example, wood is a direct material for furniture manufacturers.
Cement makers use lime stone as a raw ingredient. Direct materials typically account for a sizable
amount of total manufacturing costs. Direct material is also known as raw material at times.
A company's finished product may become raw material for another company. Cement, for example, is a
finished product for cement makers and raw materials for building enterprises.

The phrases product cost, inventoriable cost, manufacturing cost, and prime cost are related to direct
materials in the following ways.

Source: Javed, 2021

Indirect materials are one or more products, matters, or substances that are required to carry out a
production or manufacturing process but do not physically become a part of the product or a component
of it. Because the cost of such materials cannot be simply and conveniently identified, linked, or related
to a unit of product, it is categorized as an indirect. For example, the cost of lubricating moving parts of
machines in a manufacturing operation with oil and grease. Machines, furnaces, and ventilation systems
use air and oil filters (Javed, 2021).

2.1.1.2. Direct & Indirect labor costs

Salaries, wages, remunerations, and fringe benefits are all included in direct labor costs. Workers who
actively handle and run the actual production process in a facility are known as production workers. In a
manufacturing process, they use their skills and knowledge to physically convert, transform, or alter raw
materials into finished goods. Any cost or expense incurred by non-production workers such as office,
administrative, or security personnel is not considered direct labor cost (Javed, 2021).

Direct labor is a major component of total manufacturing costs in the manufacturing industry (also
known as product cost and inventoriable cost). Both prime and conversion cost formulas include direct
labor cost as a component. We get the prime cost figure when we add direct labor to the direct materials
cost, and we get the conversion cost figure when we add it to the manufacturing overhead cost. The
total manufacturing cost of an entity is equal to the sum of all three manufacturing costs (direct
materials, direct labor, and manufacturing overhead). The following formulas show how these
manufacturing costs are related:

Source: Javed, 2021

The labor cost of an entity's workers and employees who are not direct labor workers is known as
indirect labor cost. This is the cost of workers and employees who do not actively participate in the
conversion, transformation, or alteration of raw materials into finished goods. Although indirect labor
workers and employees do not produce any goods, they are necessary to ensure the smooth operation
of the company as a whole by assisting those who work in production and other areas (Javed, 2021).

In the manufacturing industry, indirect labor costs are divided into two categories: production-related
indirect labor costs and administrative indirect labor costs. Because production-related indirect labor
costs go to manufacturing overhead, they eventually become part of the total product cost, just like
direct materials and direct labor (Javed, 2021).

2.1.1.3. Manufacturing overhead cost

According to Javed (2021), manufacturing overhead costs are costs other than direct materials and direct
labor that are incurred during the manufacturing process (also known as factory overhead costs). They
usually include indirect materials, indirect labor, supervisor's salary, lighting, heating, and factory
insurance costs, among other things. Manufacturing overhead costs, on the other hand, are difficult to
track down to individual finished product units. Conversion cost is the sum of direct labor and
manufacturing overhead costs.
 Cost of conversion formula:
Direct labor cost + manufacturing overhead cost = conversion cost
Manufacturing cost is the sum of direct materials, direct labor, and manufacturing
overhead costs.

Manufacturing cost formula:

Manufacturing costs are calculated as follows: direct materials + direct labor +
manufacturing overhead.

2.1.2. Non-manufacturing costs:

As Shamsa (2021) points out non-manufacturing costs are those that are not incurred during the
production of a product. Salary of salespeople and advertising expenses are two examples of such
expenses. Non-manufacturing costs are typically divided into two categories.

 Marketing and Selling Costs

 Administrative Costs

2.1.2.1. Marketing & Selling costs

All costs associated with securing customer orders and delivering the finished product to customers are
referred to as marketing or selling costs. These expenses are commonly referred to as order getting or
order filling expenses. Advertising, shipping, sales commission, and sales salary are all examples of
marketing or selling costs (Shamsa, 2021).

2.1.2.2. Administative costs

Administrative costs encompass all administrative, organizational, and secretarial expenditures
connected with an organization's general management as opposed to producing, marketing, or selling.
Executive remuneration, general accounting, secretarial, public relations, and other costs associated with
the overall, general administration of the business are examples of administrative costs (Shamsa, 2021).
 2.2. Direct & Indirect costs
Direct costs are expenses that can be easily linked to a specific "cost object," such as a product,
department, or project. An appliance manufacturer, for example, requires steel, electronic components,
and other raw materials to manufacture its product. Direct costs are incurred when your company
develops software and requires specific assets, such as purchased frameworks or development
applications (Spielman, 2021).

Direct costs include:

 Manufacturing supplies
 Equipment
 raw materials
 Labor costs and other production costs

Indirect costs include the materials and supplies required for a company's day-to-day operations.
Supplies, utilities, office equipment rental, desktop computers, and cell phones are examples of indirect
costs. Indirect costs, like direct costs, can be fixed or variable. Rent is an example of a fixed indirect cost.
The fluctuating costs of electricity and gas are examples of variable costs (Spielman, 2021).

Indirect costs include the following:

 Utilities
 Supplies for the office
 Technology in the workplace
 Promotional campaigns
 Payroll and accounting services
 Employee benefit and incentive programs
 Insurance premiums

2.3. Fixed – Variable costs

Nickolas (2021) has shown that a fixed cost is an expense that a business is required to pay that is usually
time-related. The rent a company pays for office space and/or manufacturing facilities is a great example
of a fixed expense. Unless both landlords and tenants agree to re-negotiate a lease agreement, this is
normally a contractually agreed-upon term that does not change.

Variable costs are determined by the volume of a company's production. As a result, if the company
receives an unusually big purchase order during a particular month, its monthly expenses will grow in
proportion. Furthermore, the costs of commodities and other raw materials for manufacturing can
fluctuate, affecting a company's variable expenses (Nickolas, 2021).

Fixed cost Variable cost

Incurred when Fixed costs are incurred even if the The cost rises or falls in relation to the
output is nil. output.
Also known as Overhead costs, period costs, and Variable costs are sometimes known
supplemental costs are all examples as prime costs or direct costs since
of fixed costs. they have a direct impact on output
levels.
Natural Fixed expenses are time-related, Variable expenses are volume-related
which means they remain constant and alter as output levels change.
across time.

2.4. Opportunity cost

According to Fernando (2021), the potential gains that an individual, investor, or organization misses out
on when choosing one option over another are referred to as opportunity costs. Because opportunity
costs aren't visible, they're easy to overlook. It is easier to make better decisions when you are aware of
potential missed chances. A company's opportunity costs may be underestimated if it follows a specific
business plan without first examining alternative alternatives.

Opportunity Cost Formula and Calculation:

FO−CO= Opportunity Cost

FO=Return on best forgone option
CO=Return on chosen option
Is there a real cost to opportunity cost?
The cost of opportunity does not shown on a company's financial statements. However, opportunity
costs are still quite substantial in terms of economics. However, because opportunity cost is such a vague
term, many businesses, executives, and investors fail to consider it in their daily decisions (Fernando,
2021).

2.5. Sunk costs

Money that has already been spent and cannot be recovered is referred to as a sunk cost. The axiom
that "you have to spend money to make money" is represented in the phenomena of sunk cost in
business. A sunk cost differs from future costs incurred by a company, such as inventory acquisition costs
or product pricing decisions. Future business decisions do not include sunk costs because the cost
remains constant regardless of the decision's outcome. Not all fixed expenses are sunk costs, and not all
sunk costs are fixed costs. Sunk costs, on the other hand, cannot be recovered (Touliva, 2021).

What Is the Difference Between Sunk Cost and Opportunity Cost?

As Fernando (2021) points out a sunk cost is money that has already been spent, but an opportunity cost
is the potential return on an investment that will not be realized in the future because the capital was
invested elsewhere. A sunk cost can also refer to the initial outlay for an expensive piece of heavy
equipment, which may be amortized over time but is sunk in the sense that it will not be recovered.

3. Practical questions:

II. (P4) Explain budget and planning tools for budgetary control
1. What is Budget?
Schawahn (2020) has shown that a budget is a set of guidelines for balancing income, expenses, and
financial goals over a set period of time. A budget is a financial plan that is based on your income and
expenses. In other words, it's a forecast of how much money you'll make and spend over a given time
period, such as a month or a year. (A family budget is when you account for everyone in your
household's receiving and outgoing money.)

Where does your organization stand when it comes to budgeting? Should you begin at the top and work
your way down?
 2. Distinguish between top-down, bottom-up, and participative budgeting. Give each
method's cost and benefit.
2.1. Top-down budgeting
Top-down budgeting is a type of "budget allocation" that begins with a fixed amount and distributes
funds and resources among departments as needed. Past performance and present market conditions
are considered, while the budget for the previous year and past performance are used to determine
which departments should receive what. However, some money are frequently set aside at the
corporate level, allowing for last-minute shuffles or resource requests if departments believe they lack
the resources they require to accomplish their specific objectives (Webster, 2020).

2.1.1. Top-down budgeting: Pros & Cons

Pros Cons
- Executive buy-in is pre-programmed: - Obtaining departmental buy-in can be
Because management is involved early on, more difficult. Individual departments
you can be confident that your budget will may not be motivated to see the budget
represent their perspective and succeed if they are not included in the
aspirations, as well as the future growth budgeting process. Intra-departmental
plans and strategic direction of your rivalry may also occur if one department
company as a whole. Furthermore, by believes its aims are being emphasized
regulating departmental expenditures over those of another department.
based on overall goals, you hold
departments more accountable to those - It can create an environment in which "if
goals. you don't spend it, you lose it." What you
see as an endeavor to be more efficient
- It could be done faster: Top-down with your expenditures as a finance team,
budgeting is often faster than bottom-up departments may see as a danger to
budgeting, and it can also offer future resources. As a result, they may feel
organizational transparency into business- compelled to spend all they have even if it
wide expenditure. isn't necessary to fulfill their objectives—
or risk having their next budget cut.
 2.2. Bottom-up budgeting
Every time, zero-based budgets start from scratch in order to justify and prioritize every departmental
spending. To make the process go more smoothly, company-wide goals and expectations are frequently
discussed with departments beforehand. Departments submit budgets for approval, which are then
reviewed by the finance team or budget committee (Webster, 2020).

2.2.1. Bottom-up budgeting: Pros & Cons

Pros
- It is frequently more efficient: Bottom-up
budgeting is often based on a more
efficient and frequently more accurate
evaluation of where resources need to be
allocated to produce outcomes, since
departmental teams keep a closer eye on
the resources they need to accomplish
their goals.
- It is more in line with departmental
requirements: Because the executive
team may not always have complete
visibility into the various programs or
initiatives that each department is working
on, they may be unsure of how or where
to devote resources to achieve the best
results. Departments, on the other hand,
do. In a bottom-up strategy, departments
—and their managers—are ultimately in
charge of their own budgets, so they're
more inclined to rally behind the overall
Cons
- In general, departmental teams keep a
closer check on each other. It may result
in overspending. Managers typically pad
their requests to give themselves wiggle
space for revisions, which can throw the
entire organizational budget off if you
don't keep an eye on it.
- It may take more time to develop (unless
aided by the right technology). Bottom-up
budgeting begins with a succession of
smaller budgets, which are subsequently
integrated to form a more cohesive
budget for the entire business. Making
those smaller budgets work together, as
well as going over each line item to make
the required changes to match the
company's overall goals, can take time and
resources. It's also something that a
product like Excel wasn't built for in the
first place, so it may require more
 results. advanced technology to make it work.

2.3. Participative budgeting

People at lower levels of management can participate in the budgeting process through participatory
budgeting. Employees have a higher sense of ownership and control over the budget as a result. Because
it is easier for supervisors to understand their employees' financial demands, this strategy allows firms to
develop more realistic budgets. Imposed budgeting refers to a method in which a company's senior
management is in charge of allocating finances without consulting lower-level management or
employees (Indeed Editorial Team, 2020).

2.3.1. Participative budgeting: Pros and Cons

Pros Cons
- Employee motivation is boosted when - Budgetary slack happens when an
they are involved in the budgeting organization's revenue forecasts are
process. They feel valued when they underestimated or its expenses are
complete a significant assignment, which overestimated. This makes it simpler for
frequently leads to increased job managers and staff to meet their
satisfaction. Employees who believe they objectives. Budgetary slack can stifle a
are important to the company's success company's growth by making employees
are more productive and innovative less productive. Their prospective
because they put more effort into performance levels drop when they can
accomplishing their objectives. easily reach targets and fulfill the
company's expectations. It's critical that
- Inviting lower management to help create the organization assesses the accuracy of
budgets generally improves the accuracy projected budgets using historical data.
of such budgets. People are more
accountable when they have a greater - Employees may become dissatisfied if
sense of ownership. As a result, they're intermediate or senior management
more motivated to perform well and rejects some ideas or budget drafts.
produce more accurate budget forecasts Before budgeting, it's a good idea to
 because they've realized they're now establish a clear organizational structure.
responsible for their ideas and actions. This will help with general communication.
Implementing conflict-resolution
procedures is also critical in determining
- One of the most efficient ways to create a
how to achieve the common goal.
successful information channel inside an
organization is to transfer proposals from - Participatory budgeting can be extremely
lower to upper management. It time-consuming for lower-level
establishes a network of relationships that management. To effectively perform this
enables organizational leaders to better process, a larger number of individuals
understand their employees' needs and must be involved, which may result in
concerns. It's also useful for lower-level increased labor costs. Implementing this
employees because it allows them to budgeting strategy may be a smart option
express themselves and has a genuine for organizations with highly experienced
impact on their working environment. personnel because they are also highly
proficient in their tasks and can swiftly
- When employees at various levels assess their department's demands.
collaborate to develop, exchange, and
implement ideas, the result is frequently a
situation in which everyone in the
organization is working toward the same
goal. Different teams can effectively
collaborate while executing a strategy if
their goals are congruent. It pulls
individuals together while also making
them feel accountable for the company's
overall success.

- Strategic managers might save time by

 asking lower management to participate in
the budgeting process. They can
concentrate on other vital activities
instead of contemplating budgets. Despite
the fact that they still approve budget
drafts and frequently suggest adjustments,
it takes them far less time than other kinds
of budgeting.

3. Types of budget
3.1. Operating budget or Master budget
An operating budget indicates the company's planned revenue and expenses for an upcoming period –
usually the next year – and is often given in the form of an income statement. Typically, management
compiles the budget before the start of each year and then makes regular revisions each month. An
operating budget may include a high-level summary schedule accompanied by detail to support each line
item in the budget (Gaffney, 2019).

What Is the Purpose of an Operating Budget?

According to Gaffney (2019), an operating budget assists companies in setting and achieving business
objectives. Managers can compare actual outcomes to the operating budget and examine the results
each month or quarter by asking questions like:

 Are sales higher or lower than expected?

 Were there any unanticipated costs?
 Is it necessary to revise figures for the rest of the year?

Analyzing the outcomes can assist businesses in adapting to changing situations, updating their activities
and strategies as needed, and achieving improved performance.

What Are the Parts of an Operating Budget?

 Revenue
  Variable costs
 Fixed costs
 Non-cash expenses
 Non-operating expenses

A management team's central planning tool for directing a corporation's activities is the master budget.
It's the sum of all lower-level budgets generated by a company's various functional areas, and it usually
covers the entire fiscal year. An explanatory text that explains the company's strategic direction and how
the budget will help achieve specific goals may be included with the master budget (Bragg, 2021).

The following budgets are included in the master budget:

 Direct labor budget

 Direct materials budget
 Ending finished goods budget
 Manufacturing overhead budget
 Production budget
 Sales budget
 Selling and administrative expense budget

3.2. Capital Budget

As Kenton (2020) points out the process by which a company evaluates potential major projects or
investments is known as capital budgeting. A company might evaluate a potential project's lifetime cash
inflows and outflows to see if the expected returns are sufficient. Investment appraisal is another name
for capital budgeting.

According to Hofstrand (2013), the steps involved in capital budgeting are outlined below.

1. Determine the individual's or company's long-term objectives.

2. Identify potential investment proposals that will help you achieve the long-term objectives you
set out in Step 1.
3. Estimate and analyze the investment proposal's relevant cash flows, as identified in Step 2.
4. In Step 3, use the capital budgeting methods outlined below to determine the financial feasibility
of each of the investment proposals.
5. From the investment proposals outlined in Step 4, select the projects to implement.
6. Put the projects you chose into action in Step 5
7. Monitor how well the projects you implemented in Step 6 are meeting your capital budgeting
projections and make changes as needed.

III. REFERENCES
1. BambooHR. 2021. What is an Operating Budget? | BambooHR. [online] Available at:
<https://www.bamboohr.com/hr-glossary/operating-budget/> [Accessed 23 December 2021].
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at: <https://www.accountingtools.com/articles/2017/5/14/master-budget> [Accessed 23
December 2021].
3. Fernando, J., 2021. What Is Opportunity Cost?. [online] Investopedia. Available at:
<https://www.investopedia.com/terms/o/opportunitycost.asp> [Accessed 23 December 2021].
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Available at: <https://www.freshbooks.com/hub/accounting/fixed-cost-vs-variable-cost>
[Accessed 23 December 2021].
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at: <https://smallbusiness.chron.com/operating-budget-61475.html> [Accessed 23 December
2021].
6. Hofstrand, D., 2013. Capital Budgeting Basics | Ag Decision Maker. [online] Extension.iastate.edu.
Available at: <https://www.extension.iastate.edu/agdm/wholefarm/html/c5-240.html>
[Accessed 23 December 2021].
7. Indeed Career Guide. 2021. What Is Participative Budgeting? (With Tips, Pros and Cons). [online]
Available at: <https://www.indeed.com/career-advice/career-development/participative-
budgeting> [Accessed 23 December 2021].
8. Nicolas, S., 2021. The Difference Between Fixed Cost, Total Fixed Cost, and Variable Cost. [online]
Investopedia. Available at: <https://www.investopedia.com/ask/answers/032715/what-
difference-between-fixed-cost-and-total-fixed-cost.asp> [Accessed 23 December 2021].
9. Schawahn, L., 2020. Budget Definition: What Is a Budget? - NerdWallet. [online] NerdWallet.
Available at: <https://www.nerdwallet.com/article/finance/what-is-a-budget> [Accessed 23
December 2021].
10. Spielman, E., 2021. [online] Businessnewsdaily.com. Available at:
<https://www.businessnewsdaily.com/5498-direct-costs-indirect-costs.html> [Accessed 23
December 2021].
11. Shamsa, 2021. Manufacturing Costs & Nonmanufacturing Costs-Definition|Explanation|
Examples. [online] Accountingdetails.com. Available at:
<https://www.accountingdetails.com/manufacturing_and_nonmanufacturing_cost.htm>
[Accessed 23 December 2021].
12. Tamplin, T., 2021. What Is Cost? | Definition, Explanation, How to Calculate & Examples. [online]
Finance Strategists. Available at: <https://learn.financestrategists.com/explanation/cost-
accounting/what-is-cost-and-its-types/> [Accessed 23 December 2021].
13. Touliva, A., 2021. Sunk Cost. [online] Investopedia. Available at:
<https://www.investopedia.com/terms/s/sunkcost.asp> [Accessed 23 December 2021].
14. Webster, E., 2020. Top-Down vs. Bottom-Up Budgeting | Vena Solutions. [online]
Venasolutions.com. Available at: <https://www.venasolutions.com/blog/budgeting-
forecasting/top-down-and-bottom-up-budgeting> [Accessed 23 December 2021].