Introduction to Management Accounting
Management Accounting is the imperative aspect for any organization as it determine organization long run growth and success. It enables management to allocate financial resources for all business activities effectively so as to achieve long as well as short term objectives. Present report is based on case study of Jeffrey and Son's which manufactures popular brand products as Exquisite. The cited organization want to reduce operating cost due to competitive nature of environment. In this regard cost of products and services has been calculated by taking into account margin of profit. Furthermore, absorption of costing techniques have been explained. In addition to this, appropriate budgeting methods are also described.
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Different types of cost classification
Cost are classified in different aspect and these are explained as follows-
Element-It is the most important factor in allocating cost of products and services. Here, cost is classified into direct and indirect which are related to production activities or other related. Further, direct cost consists of lighting, heating and material. On the other hand, examples of indirect cost are not directly related to production. It includes administrative expenses and salaries of higher staff etc (Cohen and Kaimenaki, 2011).
Function- There are several functions performed in Jeffrey and Son's such as production, finance, sales and marketing. It facilitates to carry out business activities in an effectual manner. It helps to select pricing strategy effectively and increase overall flow of production in the marketplace (Jones and Clatworthy, 2006).
Nature-According to nature cost is divided into three parts such as labour, overhead expense and material. It assists corporation to differentiate all the functions effectively and accordingly allocate cost for each department (Kate-Riin Kont, 2012).
Behavior-According to behavior cost is mainly divided into three parts such fixed, semi fixed and variables (Mock, Coram and Monroe, 2011). Here, variable cost includes labor and material whereas example of semi fixed cost is telephone bill which remain constant to a particular level.
Calculating cost of Exquisite using absorption costing technique
Rent Machinery X 10/50 x £100000 = f20000 Machinery Y 5/50 x £100000 = £10000 Assembly 15/50 x £100000 = £30000 Stores 15/50 x £100000= £30000 Maintenance 5/50 x £100000 = £10000
Insurance & Machinery Machinery X 800/1510 x £15000 = £7964
Machinery Y 500/1510 x £15000 — £4966 Assembly 100/1510 x 15000 — £994 Stores 50/1510 x £15000= f 497 Maintenance 5/1510 x £15000= £596
Depreciation of Machinery Machinery X 800/1510 x £150000 = £79470
Machinery Y 500/1510 x £150000 = £49669 Assembly 100/1510 x £150000 = £9934 Stores 50/1510 x £150000 = £497 Maintenance 60/1510 x £150000 = £596
Insurance of Buildings Machinery X 15/50 x £25000 — £5000
Machinery Y 5/50 x £25000 = £2500 Assembly 15/50 x £25000 = f7500 Stores 15/50 x £25000 — £7500 Maintenance 5/50 x £25000 = £2500
Salaries of works mgmt. Machinery X 3/10 x £80000 = £24000
Machinery Y 2/10 x :E80000 = £16000 Assembly 3/10 x £80000 = £24000 Stores 1/10 x £80000 — £8000 Maintenance 1/10 x £80000 = £8000
Reappointing workings: based on material issues
Machinery X 400/800* £79964 = £39982
Machinery Y 300/800 * £79964 = £29987
Assembly 100/800 * £79964 = £99995
Based on time spent
Machinery x 12/25 * £101056 = £48507
Machinery y 8/25 * £101056 = £32338
Assembly 5/25 * £101056 = £20211
Overhead absorption rate workings
Departments = Total / actual machine hours per department
Machinery X = £ 434906/ 80000 = £5.44
Machinery Y = £349960/ 60000 = £5.83
Assembly = £250134/ 10000 = £25.01
Overhead absorption rate
Machinery X= 434906/80000=5.44
Machinery Y= 349960/60000= 5.83
Variance analysis of budget
Material cost-The material cost changes very frequently because it changes with volume of production. The budget is showing that budgeted material was 24000 but actual was 22800. It depicts that because of material there will be no any impact on cost.
Labour cost-According to the budget it has been found that actual cost of labour is greater than from budgeted. Owing to this, cost scenario has been changed to a great extent (Theeke and Mitchell, 2008).
Fixed overhead-Fixed overhead shown in the budget has no difference and it remain constant in both budgeted and actual cost. It can be said that there was exact forecasting in the fixed overhead.
Electricity-According to the review of budget it can be noticed that changes depicted in electrical budget is favourable. Furthermore, fixed portion of electricity was constant but variable portion changes of actual electricity budget is lower (Vance, 2002).
Maintenance-Under this maintenance cost has not any kind of changes on profit and loss. It assists corporation to increase flow of production and profitability. Furthermore decrease of 100 units has not any impact on the cost scenario.
Using performance indicators to identify areas for potential improvement
There are number of performance indicators by which Jeffrey and Son's can take right action. It enables management to recognize the areas of improvement and accordingly take action for the same-
Increased customer base-It is one of the most effective performance indicator under which if there is increased base of customer then it depicts that company has good performance. On the other hand, in case of decreasing base of buyers show downward trend of corporation (Vanderbeck, 2012).
High profitability-This is another effective method and decrease or increase in the same depicts organization growth and success in the marketplace.
High market share-This shows that how well an organization is performing. For example in case Jeffrey and Son's has low market share which depicts that company is not performing good and its needs some improvement. Accordingly corrective actions are taken (Weygandt and et. al., 2009).
Ways to reduce cost and enhance value, quality
There are several ways to reduce cost and enables value as well as quality of products and services offered by company. It enables management to increase flow of production and cover cost of the same by increasing profit margin (Young, 2008). On the other hand total quality management is the most effective method under which quality of product is assessed in proper manner. This aid to increase buyers and accordingly rate of return will also be increased. Furthermore, training should be provided to personnel so as to reduce waste material and use them in the production process. This will determine long run success of company in the marketplace with increased rate of return (Elmassri and Harris, 2011).
Purpose and nature of budgeting process
The budget is most important process which facilitates to give certainty for future business activities. It enables corporation to deliver good quality of services to large number of buyers and maintaining flow of production in an effectual manner (Nyamori, 2009). Further, budget process helps to control expenses and achieve the set objectives of company.
Nature of budgeting process
The budgeting process is most imperative aspect under which management need to consider requirement of business as well as mission and vision of the same. In this regard all experienced workforce are included in the team and they make collective decision in order to achieve organizational objectives (Schoute and Wiersma, 2011). Furthermore, overall budgeting process is based on uncertainty wherein company find that what the potential barriers which can hampered performance. Similarly, budget is revised or reviewed on time to time so as to eliminate the effect of negative factors.
Selecting appropriate budgeting methods for organization
There are various budgeting method used y organization in accordance with their basic requirement. According to need of Jeffery and Son's following three kinds of budgets are explained-
Operational budget-operational budget basically include different activities like marketing, production, selling and advertisement. Similarly, by taking into account these strategies, monthly budgets are prepared by which business strategies could be taken by Jeffrey and Son's (Sulaiman and et.al., 2005).
Zero base budgeting-This is another most effective budget under which corporation do not consider past results and fresh budgets are prepared. It assists company to achieve organization objectives in right manner (Chapman, Hopwood and Shields, 2011).
Incremental budgeting-Under this budget company takes into account past factors so as to improve performance of current year. The overall guidelines in the incremental budget is based on budget of previous year (Callahan, Stetz and Brooks, 2011).
Calculation of variance
The variance of given case study has been prepared as follows and working note for the same has been explained in an effectual manner.
Sales volume variance (4160- 3040) = (1120) (A)
Sales prices variance (14000- 13820) = (180) (A)
(Budgeted: 35000*£4- Actual sales)
The material prices variances
As per the above budget it can be said that there is difference between actual and expected budget of Jeffrey and Son’s. It can be said that sales budget was 14000 but the actual is 13820. Further, it was also expected that consumption of material will be 3360 but the actual expenses for the same is 3420. It service has the positive variance where corporation is having profit. Furthermore fixed overheads were expected to be 4800 but in real it was 4900. Again it can be said that there is difference between budged and actual figures (Debarshi, 2011).
Owing to this, it can be recommended to Jeffrey and Son’s that forecasting should be done in proper manner. In fact several external factors which affect performance of corporation can also be considered at the time of estimating future profit and loss. Similarly, company can use updated technologies and tools in order to enhance efficiency and productivity in the marketplace (Macintosh and Quattrone, 2010).
Preparation of reconciliation operating statement
Reconciliation operation statement has been shown as follows. It depicts that corporation get detail information related to loss which has been occurred and other related information through which proper improvement can be taken at workplace.
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Findings to management in accordance with identified responsibility centers
As per the detail analysis of different statement it can be said that Jeffrey and Son’s need to bring improvement in the work scenario. In this regards responsibility centers like production, sales, marketing and finance need to be integrated. These are explained as follows-
Human resources department- This is most important department of Jeffrey and Son’s wherein management should put efforts to enhance efficiency. It enables corporation to increase overall flow of production and deliver good quality of services to large number of buyers (Cohen and Kaimenaki, 2011).
Production department-Production department is also the most important part of corporation wherein management need to focus on recycling of waste material so as to reduce additional cost and increase profitability (Jones and Clatworthy, 2006).
Finance department-This is one of the most imperative department under which allocation of financial resources need to be done with great care. It assists corporation to quote price effective and also set profit margin in right manner (Kont, 2012).
The aforementioned report concludes that management accounting makes it possible for corporation to reduce additional expenses and have proper control over flow of cash. This in turn corporation can effectively manage all activities related to production and other related department which in turn long as well as short term objectives of the same can be achieved. It can also be said that, performance indicator like profitability, liquidity and increased customer base aid to bring improvement at workplace.
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- Chapman, C. S., Hopwood, A. G. and Shields, M. D., 2011. Handbook of Management Accounting Research. Elsevier.
- Cohen, S. and Kaimenaki, E., 2011. Cost accounting systems structure and information quality properties: an empirical analysis. Journal of Applied Accounting Research.
- Debarshi, B., 2011. Management Accounting. Pearson Education India.
- Elmassri, M. and Harris, E., 2011. Rethinking budgetary slack as budget risk management. Journal of Applied Accounting Research.
- Jones, J. M. and Clatworthy, A. M., 2006. Differential patterns of textual characteristics and company performance in the chairman's statement. Accounting, Auditing & Accountability Journal.
- Kate-Riin Kont, 2012. New cost accounting models in measuring of library employees' performance. Library Management.