Management Accounting - Costing and Budgeting

TASK 1

1.1 Fixed, variable and semi-variable cost along with other ways of cost classification

a. Columnar table of fixed, variable and semi-variable cost

Fixed cost – These are the costs which are static in nature and does not change with changing activity. This cost is does not depended on the volume of goods and services produced by an organisation. These expenses are time related and referred as overhead costs. Some of the examples of these costs are salaries, insurance, depreciation, rent etc (Bennett, 2013).

 Variable cost – These costs are flexible in nature and change according to the level of production and business operations. Variable or marginal costs increase and decrease according to the business activities of an organisation. Some of the examples of these costs are direct material, direct labour, production supplies, shipping costs etc.

Semi variable cost – Semi variable costs are the combination of both fixed and variable costs. Part of these expenses are fixed which does not change and some part of these expenses are variable which may change according to the level of business operations. Some of the examples of these these expenses are commission charges and semi variable labour costs (Bovens, 2014).

Fixed cost	Factory rent Power for sewing machine in factory(per unit of electricity)
Variable cost	Factory supervisor wages Packaging material Office rates Material for clothes
Semi variable cost	Telephone Factory heating Delivery drivers pay

b. Few other ways of classification costs    

Fewer other ways of classification of costs

Costs are the expenses which are needed to be paid by the organisation. These costs can be categorized by various ways and few of them are discussed below:

• By Function – Under to this classification, costs are divided according to their related functions for which they are incurred. Broad classes included in this classification are production, administration, selling and distribution (Chiwamit, 2014).
• By Nature - Expenditures occurred in an organisation can be classified according to their nature of activity for which they are incurred, such activities are production, administration, selling and distribution etc.
• Level of controllability – Under this, expenses are divided into two classes. First category is of costs which can be controlled by the management like direct labour, direct material etc. whereas another category is of uncontrollable expenses such as salaries, rent etc.
• By time – According to this classification, expenses are divided into two categories and they are historical costs and pre determined cost. Historical costs are the expenses which are ascertained after they are incurred in past and predetermined costs are estimated or projected cost which are ascertained for future using trend analyses. 
• By normality – Costs are classified as normal costs and abnormal costs under this classification. Normal costs are the expenses which are incurred due to normal or regular business operations and abnormal costs are the expenses which are incurred due to irregular business situations such as fire or theft (Edwards, 2012).

1.2 Computation of total cost and unit cost

Computation of the Total cost for the production various units

Particular	Units (15000)	Units (20000)	Units (25000)
(A)Direct Variable cost:
1. Material (@5 per units)	75000	100000	125000
2. Labour (@6 per units)	90000	120000	150000
Total variable cost	165000	220000	275000
(B) Fixed cost	50000	50000	50000
Total cost (A+B)	215000	270000	325000

1.4 Graphical representation and analysis

Graphical representation of computation of total cost

From the above tabular presentation of calculation of total costs, it has been analysed that if a production organisation manufacturers 15000 units then they will incur total cost of 215000 which is calculated from the sum of variable and fixed expenses. Accordingly if that organisation will produce 20000 and 25000 units then the company has to bear total expenses of 270000 and 325000 respectively.

Read more: Marketing Essentials of Apple Inc

1.3 Computation of inventory using various methods

FIFO method

First In first out is a inventory valuation method, which assumes that the goods which are first purchased are the ones which are first sold. This system is considered as the most suitable method when there is a determination of cost theoretically (Gunarathne, 2015).

Particulars	Quantity	Price per unit	Total cost	Qty.	Price/unit	Total	Qty.	Price/unit	Total
01 Jan, Opening inventory	500	20	10000	-	-	-	-	-	-
18 Jan, Inventory purchased	800	24	19200	-	-	-	-	-	-
25 Jan, Inventory purchased	700	26	18200	-	-	-	-	-	-
Total	2000	70(U)	47400	-	-	-	2000	70(U)	47400
Sales in January (1400)units   Total	-	-	-	500 800 100 1400	20 24 26 -	10000 19200 2600 31800	(1400) 600		15600

From the above performed inventory analyses, it can be said that total purchased inventory is of 47400 and total sales from those stock are 15600.

LIFO method

According to the Last In first out method, organisation assumes that the goods which are purchased last are the ones which are sold first. This system is not considered as suitable for most organisations and this method is only practised theoretically (Melnyk, 2014).

Particulars	Qty.	Price/ unit	Total Cost	Qty.	Price/ unit	Total Cost	Qty	Price/ unit	Total Cost
Sales in January (1400)	500 800 100	20 24 26	10000 19200   2600	- - -	- - -	- - -	- - -	- - -	- - -
Total sales & Balance	1400	-	31800	-	-	-	1400	-	31800
01 Jan, Opening inventory	-	-	-	500	20	10000	-	-	-
18 Jan, Purchased stock	-	-	-	800	24	19200	-	-	-
25 Jan, Purchased stock	-	-	-	100	26	2600	-	-	-
Total cost	1400		31800	2000	-	31800	-	-	-

From the above calculation, it can be said that total sold goods for the month January were 1400 from the total purchased stock of 2000 units.

Average cost method

This method is considered as the most suitable method as it includes calculation of ending inventory cost. This system is practised by most of the organisation by dividing COGS for sales from the units available for sales. By using this technique, weighted average cost per unit can be ascertained.

2.1 Report for various inventory methodsTASK 2

FIFO – Smart look company has used various inventory management systems in order to  identify cost involved in inventories. According to the above performed FIFO analyses, sales outcome is 2000 units from the total cost of 47400. Whereas, in the same organisation 1400 units are sold by bearing total loss of 600 units due to which total cost is also decreased to 15600.

Cost of goods sold using this method is calculated below:

LIFO – According to the LIFO method, the results which are obtained are complete reverse as the units available by the organisation are 1400 for which have incurred cost of sale of 31800. No information is available for the purchased inventory of the company due to which it has referred as nil. With the help of this analysis method, total cost available in the organisation for the sale and purchase of inventory is calculated and evaluated. Cost of goods sold for the inventory of January month is calculated below:

Customer experience2.2 Performance measuring metrics along with their success factorsAverage cost method – Smart looks company has used average cost method in order to help the organisation to ascertain average cost that they have to pay for the very unit produced. From the above calculation of average cost method, it has been observed that 23.7 per unit is to be paid for each unit which is produced by the company. Cost of goods sold the January month using this method is calculated below:

This term refers to the experience which is faced by the customer by the interaction from organisational system. These experiences can be traced by the internal and personal reaction of the clients. Smart look company considers customer experience as a prime element as it impacts overall productivity and profitability of the organisation (Stergiou,  2013). Two success factors inclined with this experience are:

• When it comes to problem resolving issue, customer care executives should be quick and prompt as client usually acts impatient and they requires their solution as soon as possible.
• Along with speedy solutions and suggestions, executives should behave in an proper manner with right attitude and tone so that customers should feel respected and there will be a chance of great feedback.

Supplier and product quality

For any company such as Smart looks, it is the most important element to produce quality products so that they can grow in market and can gain brand equity. In order to produce quality products, organisation needs to have an efficient supply chain management. Few success factors of quality product are discussed below:

• Product quality highly relied on proper communication system. As, if smart looks company can well communicate about their quality factors then the have maximum chances of manufacturing quality goods and services.
• Along with proper communication, maintaining good relations with employees can also helps in attaining quality products as they are the human assets of the organisation.

Operations efficiency

Operation efficiency is the ability of the Smart looks company which reflects productivity and how well a organisation can perform their business activities. In order to improve this efficiency, success factors are mentioned below:

• Smart looks company should reduce the complexity in this business operations which will provide a clear vision about various tasks and activities which are needed to be performed to attain operational efficiency.
• Fixed costs such as storage cost and others must be effectively managed as the influence growth of the company (Suomala, 2012).

Reducing maintenance spending

Smart looks company should cut down their expenses which are irrelevant or unnecessary. Maintenance expenses highly impact an organisation as these expenses can be decreased by proper management and controlling practices. Success factors related to maintenance expenses are mentioned below:

• Smart looks company should use computerised maintenance technology so that they can control these expenses by using more reliable and accurate measures.
• This organisation must include preventive maintenance in their operations, according to which they should set a fixed schedule for checking of critical equipments.

Cost reduction and profitability increase

Cost included in business operations must be reduced by Smart looks company in order to gain more profitability which will help the organisation in growth and development. Success factor for this metric are:

• In order to gain increased profitability, the above mentioned company should produce more attractive and cost efficient products in order to attract customers.
• Economy growth is also an success factor as, if the economy is growing then the demand for luxury goods will also increase (Tucker, 2016).

2.3 Suggestions of reducing cost

 In order to reduce the costs, few suggestions are mentioned below:

• Smart looks company can reduce its supply expenses such as office supplies which can be reduced by buying these goods in bulk through a specific vendor.
• Production costs and financial expenses should be lowered by using updated technologies along with using various policies such as optimum utilisation of the resources.

Value and quality can be enhanced by focusing on qualitative measures and not quantitative measures as by producing quality products, organisation can gain trust of public which will ultimately result in enhanced value of the company. This value can be increased using various strategies of price constant and others (Zaleha Abdul Rasid, 2011).

TASK 3

3.1 Definition and Purposes of budgets

a. Definition of budget

Budget is a estimation of future cost and incomes over a specific period of time which shows future aims and objectives. It includes all forecasts about financial results and position of an organisation (Wild, 2012).

b. Purpose of budget

Budgets are prepared in every organisation with few specific aims which are mentioned below:

• The main aim of preparing budgets are forecasting future incomes and expenditures which helps an organisation like Smart looks in planning process. This process helps an organisation's managers to predict future profit and loss. Budgets helps in preparation of plans, policies, strategies etc.
• Budgets are prepared with the goal of decision making. These estimations provides a financial framework which assist in decision making process. These decisions are made regarding spending funds on various business operations like promotion, advertising etc.
• Another objective of budgets is to monitor and control business performance. The purpose of budgeting is to enable the actual business performance to be measured against the forecasted performance. This ultimately ascertains that the whether the business is operating according to the expectations or not (Wouters, 2015).
• Zero based budget – According to this budget, all expenses must be justified for every new accounting period. In budget is based on zero base by which every function with an organisation is analysed (Zero based budgeting, 2018).
• Fixed budget – Fixed budget is the static budget which does not change or flex when sales or production units changes. Smart look company uses its budget to estimate commission of their members.
• Variable budget – This budget is also known as flexible budget, expenses are incomes change according to the sales and production unit of the organisation.

3.2 Various methods of preparing budget

3.3 Preparation of various budgets

a. Sales Budget

Particular	April(units)	May (units)	June(units)	Total
Sales	2000	1500	2500	5000units
Unit sales price@30	60000	45000	75000
Total sales	60000	45000	75000	180000

b. Production budget

Particular	April(units)	May (units)	June(units)
Total sales units	2000	1500	2500
Add: closing finished stocks	150	250	100
Total unit needed	2150	1750	2600
Less : Beginning finished goods	100	150	250
Scheduled production	2050	1600	2350

c. Raw material budget

Particular	April(units)	May (units)	June(units)	Total
Total Raw material Units	2000	1500	2500	5000
Add : Closing inventory Of RM	750	1000	1200	2950
Total Needed	2750	2500	3700	8950
Less : Opening inventory of RM	500	750	1000	2250
Total Raw material cost	2250	1750	2700	6700
Direct Material @1.50 per  7.50	7.5	7.5	7.5	7.5
Total RM purchase	16875	13125	20250	50250

d. Labour budget

Particular	April(units)	May (units)	June(units)
Units to be produce	2050	1600	2350
Direct Labour cost per unit @	6	6	6
Total hours	12300	9600	14100
Direct Labour cost per hour @	9	9	9
Total Direct Labour cost	110700	86400	126900

e. Total overhead budget

Particular	April(units)	May (units)	June(units)
Budgeted Direct Labour	2050	1600	2350
Variable Overhead @3	6150	4800	7050
Fixed overhead	2000	2000	2000
Total overhead budget	8150	8800	9050

3.4 Preparation of cash budget

Months	April	May	June
Opening cash	£1200	15325	24950
Receipts:
Cash sales	£60000 (2000*30)	£45000 (1500*30)	£75000 (2500*30)
Total receipts	£61200	£60325	£99950
Payments:
Material purchases	£16875	£13125	£20250
Total variable cost	£9000	£6750	£11250
Total labour cost	£18000	£13500	£22500
Fixed over heads	£2000	£2000	£2000
Total payments	£45875	£35375	£56000
Net cash flow	£15325	£24950	£43950

TASK 4

4.1 Preparation of budgeted income statement

a. Calculation of budgeted profit

Particulars	Amount
Cost of direct material	30
Cost of direct labor	18
Per unit variable cost	48
No. of units	5000
Total variable cost	240000
Total Fixed cost	12500
Total cost	252500
Particulars	Amount
S.P. per unit	63.23
Total revenue	316150
Total budgeted profit	63650

b. Calculation of actual profit

Particulars	Amount
Direct material	141360
Direct labour	99000
Total variable cost	240360
Total Fixed cost	12500
Total cost	252860
S.P. per unit	63.23
No. of units	4800
Total revenue	303504
Actual profit	50644

4.2 Determination of variances and preparation of reconciled statement

Calculation of variances by preparation of reconciled statement

Particulars	Budgeted Amount	Actual Amount	Variances
Total variable cost	240000	240360	-360
Total Fixed cost	12500	12500	0
Total cost	252500	252860	-360
Total revenue	316150	303504	12646
Total budgeted profit	63650	50644	13006

4.3 Recommendations

After preparation of the budget, it has been observed that the actual profit was lower than the budgeted profit and the reasons of these deviations are mentioned below along with their recommendations:

• Smart looks company, has low actual profit as the expenses incur are relatively higher for which this company should practice efficient management and controlling activities.
• Another reason for deviation is low demand and organisational productivity for which company should enhance their promotional and advertisement activities.

CONCLUSION

From the above project report, it has been concluded that management accounting techniques are significant for the success of Smart looks company. Inventory management methods such as FIFO, LIFO and used to ascertain closing and opening balance of stock along with several budgets such as fixed and flexible. Several recommendations and interpretations are performed in order to analyse all numerical calculations. Performance metrics along with their success factors are also discussed in this report.