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Unit 13 Cost and Management Accounting - Pearson BTEC International Level 3 Extended Diploma in Business

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Qualification - Pearson BTEC International Level 3, Extended Diploma in Business

Unit Name - Cost and Management Accounting

Unit Number - Unit 13

Level - Level 3

Assignment Title - Cost and Management Accounting techniques used in business

Learning Outcome 1: Explore absorption and marginal costing techniques for decision making
Learning Outcome 2: Carry out standard costing and variance analysis statements
Learning Outcome 3: Explore budgets for financial planning and control
Learning Outcome 4: Undertake investment appraisal of long-term capital investment.

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Scenario:

You have recently been appointed as a trainee in the Finance and Accounting department of a company. As a part of your internship, your team head has asked you to prepare reports to show your understanding and application of cost and management accounting techniques. He has given you tasks related to costing methods and management accounting decisions used widely in business organisations.

You must prepare the required reports and case studies given and submit the report to your Team head as a part of your internship so that the company offers you a full time job in this department.

Task 1.

You must write a report explaining the difference between cost and management accounting. Categorize and explain the different types of cost. Explain the costing methods like absorption costing and marginal costing used by business in different decision-making situations like the ones provided below by calculating accurately the absorption and marginal cost statements. Further, assess appropriateness of these methods used for decision making in the given situations.

Also give justified recommendations to improve the financial performance of the business in the given situations.

Situation I:
Aries Manufacturing Co. Ltd. provides the following budget information for its four departments for the coming year:

Departments Machining  Finishing  Canteen  Repairs  Total 
Cost item  AED'000 AED'000 AED'000 AED'000 AED'000
Allocated Overheads 2000 1000 200 300 3500
Factory rent



1200
Machine Depreciation



600
Staff Welfare



420

Related statistics and information for the coming year is given below.

Departments Machining  Finishing  Canteen  Repairs  Total 
Floor area sq mt 1000 2000 800 200 4000
Machine value (AED'000) 3000 1500 200 300 5000
No. of employees 100 500 40 60 700

Apportion the common overhead costs among the 4 departments and indicate the respective basis of apportionment.

The two service departments. Canteen and repairs provide reciprocal services for each other and the two production departments. The machining department is machine intensive while finishing department is labour intensive. Other information is as given below to apportion the overheads for 2 service departments to the production departments:

Departments Machining  Finishing  Canteen  Repairs  Total 
Canteen charged to 30% 50% - 20% 100%
Repairs charged to 70% 20% 10% - 100%

The budgeted level activities of the 2 production cost centers for the coming year are:

Departments Machining  Finishing  Total 
Machine hours 500,000 50,000 550,000
Direct labour hours  20,000 600,000 620,000

Calculate the appropriated budgeted overhead absorption rate (rounded to nearest ) for each production department for the coming year.
The company is asked to quote a price for an order. The direct costs are as follows:
Direct material   AED 210,000
Direct Labour   200 hours in the machining department at Aed 40 per hour.
                    12,000 hours in the finishing department at AED 50 per hour.
The order also requires 10000 machine hours' work in the machining department and 12000 Labour hour works in finishing department as overheads.

It is company policy to add a markup of 30% to the quotation price.

Calculate selling price quoted for the order.

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Situation II

Aries Company is faced with decision making for acceptance of special order from a US based customer. The operating statement of the company for that product is as follows:
AED.
Sales (80,000 units @ AED 15)
12,00,000
Costs - variable

materials 240000
labour 320000
overheads 160000

720000
Fixed costs  320000
Total costs
10,40,000
Profit 
1,60,000

Their plant capacity is 100000 units. The customer from USA is desirous of buying 20,000 units a net price of AED 10 each unit. Advice Aries company whether the offer should be accepted? Will your advice be different if the customer is a local one?

Situation III
Further Aries company want to take a decision whether to manufacture certain components or to buy them from supplier. The following cost data is available in respect of two of its components A and B.


 Component A Component B

AED per unit AED per unit
If manufactured.

Variable cost  30 30
Fixed cost 25 20

55 50
If purchased.  40 25

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Task 2:

Now that you have used different costing techniques and understood how to use them appropriately in given business scenario, the team head wants you to write a report on how to use standard costing and variance analysis in costing.

Based on the given scenario calculate the sub and overall variances. Further analyze the reasons for these variances in the given situations for the company.

P&G company produces many products for household use. Company sells products to storekeepers as well as to customers. Detergent-DX is one of the products of P&G. It is a cleaning product that is produced, packed in large boxes and then sold to customers and storekeepers.

P&G uses a traditional a standard costing system to control costs and has established the following materials, labor and overhead standards to produce one box of Detergent-DX:

Direct materials; 1.5 pounds @ AED12 per pound: AED18.00
Direct labor; 0.6 hours AED24 per hour: AED14.40
Variable manufacturing overhead; 0.6 hours @ AED5.00: AED3.00

During August 2020, company produced and sold 3,000 boxes of Detergent-DX. 8,000 pounds of direct materials were purchased @ AED11.50 per pound. Out of these 8,000 pounds, 6,000 pounds were used during August. There was no inventory at the beginning of August. 1600 direct labor hours were recorded during the month at a cost of AED40,000. The variable manufacturing overhead costs during August totaled AED7,200.

Required:
Compute materials price variance and materials quantity variance. (Assume that the materials price variance is computed at the time of purchase.)
Compute direct labor rate variance and direct labor efficiency variance.
Compute variable overhead spending variance and variable overhead efficiency variance.

The following particulars are available in respect of the sales for two products of the company for month of August:


 Budgeted  Actual     



Qty Rate Amt Qty Rate Amt
X  1000 2 2000 1800 2.5 4500
Y  3000 3 9000 4200 2.75 11550

4000
11000 6000
16050

You are required to calculate (a) Total Sales variance, (b) sales price variance, (c) Sales volume variance.

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Task 3:

The team head wants you to prepare a report on how budgeting is used in business for financial planning and control. In order to check your budgeting abilities, he has provided you with the following case study for Bibb Company. He wants you to prepare the different subsidiary budgets and the Master budget based on information provided below. He further wants you to assess the viability of the prepared budgets for the company. Further he wants you to provide a correct evaluation of the costing and budgetary control systems to the business you have learnt in Tasks 2 and 3.

Bibb Company produces and sells a single product with standard costs as follows:

Resource Standard input Cost per input Cost per unit
Direct material 2 lbs. 4 8
Direct Labour 3 hours 6 18
Variable overhead 3 hours 9 27
Fixed overhead 3 hours 10 30
Total unit cost 3 hours

Overhead rates are based on 2,000 units per month or 6,000 standard direct labor hours, i.e., this is the master budget denominator activity level. Overhead is applied based on direct labor hours.

Desired ending inventories of mat erials and finished goods are based on 5% of next period needs.
Unit Sales are budgeted as follows:

Jan Feb Mar Apr May 
2000 2000 2100 1900 1800

The budgeted sales price is AED160 per unit. All sales are budgeted as credit sales. Past experience indicates that 80% are collected during the month of sale, 18% are collected in the following month, and 2% are uncollectible. A 1% cash discount is allowed to customers who pay within the month the sale takes place.

Required:
A Partial Master Budget for March as follows.
1. Sales budget for March, including net sales dollars.
2. Calculate collections for March.
3. Production Budget, i.e., units to be produced for March.
4. Direct Material quantity needed for production for March.
5. Direct Material quantity to be purchased for March.
6. Budgeted cost of direct material purchases for March.
7. Budgeted cost of direct material used for March.
8. Direct labor needed for production for March.
9. Budgeted cost of direct labor used for March.
10. Budgeted factory overhead costs for March.
11. Budgeted cost of goods sold for March.
12. Prepare a simple Budgeted Income Statement for March. Assume selling and administrative expenses are AED54,992.

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Task 4:

The team head has provided you with details of Sunbright LLC and asked you to apply the different investment appraisal methods to the two alternative capital investment proposals available to this company. You must provide explanation of the non-financial considerations that can affect these investment proposals. Discuss the analysis of the results based on your investment appraisal calculations for the company's decision making. Further evaluate the financial and non-financial considerations for this investment proposal and formulate appropriate and relevant recommendations to the company for making a final investment appraisal decision.

A business enterprise Sunbright manufacturing LLC can make either of two investments at the beginning of 2021. assuming required rate of return in 10% p.a. evaluate the investment proposals under:
(a). Payback period
(b). Average rate return
(d). Net present value @ 10% discounted value.

The forecast particulars are given below:


 Proposal A Proposal B
Cost of Investment AED20,000 28,000
Life 4years 5 years
Scrap Value Nil Nil
Net Income (After depreciation and tax):

End of 2021 AED500 Nil
End of 2022 AED2000 AED3,400
End of 2023 AED3,500 AED3,400
End of 2024 AED2,500 AED3,400
End of 2025 Nil AED3,400

It is estimated that each of the alternative projects will require an additional working capital of AED2,000 which will be received back in full after the expiry of each project life. Depreciation is provided under the straight-line method. The present value of AED1 to be received at the end of each year, at 10% p.a. is given below:

Year 1 2 3 4 5
P.V. 0.91 0.83 0.75 0.68 0.62

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    Absorption costing and marginal costing are two methods used to determine product costs and impact decision-making in different ways.

Absorption costing allocates all production costs (fixed and variable) to each unit produced. This provides a more comprehensive view of profitability but can be slow to react to changing market conditions. It's often used for external reporting.

Marginal costing only considers variable costs in product costing. This helps identify the minimum selling price that covers variable costs and contributes to fixed costs. It's ideal for short-term decisions like special orders or pricing adjustments to maximize short-term profit.

Choosing the right method depends on the situation. Absorption costing helps with long-term planning, while marginal costing is better for short-term, quick decisions.

Standard costing involves setting predetermined costs for materials, labor, and overhead before production. These standards become benchmarks for actual costs incurred. Variance analysis then compares the actual costs with the standards, identifying any deviations.

Statements are created for each cost category (direct materials, direct labor, and overhead). These statements detail the standard costs, actual costs, and the resulting variances (favorable or unfavorable). Analyzing these variances helps pinpoint areas for improvement in efficiency, pricing, or waste reduction. It's a key tool for cost control and performance evaluation in manufacturing.

Budgets are the cornerstones of financial planning and control within an organization. They act as a roadmap, outlining expected income, expenses, and cash flow for a specific period (month, quarter, year). Here's a deeper look at their role:

Planning and Goal Setting:

Budgets translate strategic plans into financial terms. They define revenue targets, spending limits, and investment needs, providing clear direction for achieving financial goals.

Resource Allocation:

Budgets allocate financial resources across different departments and projects. This ensures everyone is working with a clear understanding of available funds and spending priorities.

Monitoring and Control:

Budgets are benchmarks against which actual performance is measured. By comparing actual income and expenses to budgeted amounts, variances can be identified.

Variance Analysis:

Investigating variances (positive or negative differences) helps diagnose potential problems or opportunities. For example, an unexpected expense variance might indicate waste or inefficiency, while a revenue variance could signal changes in market demand.

Types of Budgets:

Operating Budget: Focuses on day-to-day operational costs, including expenses like salaries, rent, and utilities.
Sales Budget: Projects future sales revenue based on historical data, market trends, and marketing initiatives.
Cash Flow Budget: Tracks expected cash inflows and outflows, ensuring sufficient liquidity to meet financial obligations.
Capital Expenditure Budget: Outlines planned investments in property, equipment, and other long-term assets.

Benefits of Budgeting:

Improved decision-making: With a clear financial picture, organizations can make informed choices about resource allocation and spending.
Increased accountability: Budgets hold departments and individuals accountable for managing their finances responsibly.
Enhanced communication: The budgeting process fosters communication across different departments, aligning financial goals with operational activities.
Risk management: By anticipating potential variances, budgets can help identify and mitigate financial risks.

Overall, budgets are powerful tools for financial planning and control. They provide a framework for achieving financial goals, promoting responsible resource management, and ensuring the long-term financial health of an organization.


Investment Appraisal for Long-Term Capital Investment

Investment appraisal is a crucial process for businesses to evaluate the potential profitability and viability of long-term capital investments. Here's a breakdown of the key steps involved:

1. Define the Project:

Clearly outline the project's objectives, expected lifespan, and required initial investment.
Gather information on potential benefits, such as increased revenue, cost savings, or improved efficiency.

2. Identify Cash Flows:

Estimate all future cash flows associated with the project, including:
Initial investment outlay
Annual operating costs (materials, labor, overhead)
Expected annual revenues or cost savings
Salvage value of the asset at the end of its useful life
Consider the time value of money. Future cash flows are less valuable than current ones, so they need to be discounted to reflect this difference.

Based on the quantitative analysis and qualitative considerations, formulate a recommendation on whether to accept, reject, or further refine the proposed investment.

Additional Considerations:

Sensitivity Analysis: Test how the project's viability changes under different assumptions about costs, revenues, or discount rates.
Project Selection: When evaluating multiple projects, consider using decision rules that prioritize projects with the highest NPV or IRR, while also factoring in risk and strategic alignment.

By following these steps and considering both financial and non-financial factors, businesses can make informed decisions about long-term capital investments, maximizing their return on investment and achieving their financial goals.