Unit 9 - Management Accounting Costing and Budgeting - Pearson BTEC Level 5 HND Diploma in Business

Scenario 1

Synergy Limited Job cost Sheet for Digital satellite receivers (DSR) for the 2^nd Quarter 2017

(Based on Marginal costing system)

*We have presumed skilled labour cost to be associated with circuit making and the unskilled labour cost to be associated with metal covering

As we study the above table we find that the cost for making circuits is 20.5 (R.O 8.5 for material and 12 for skilled labour) against the supply cost of R.O 15.

Thus the company can reduce the prime cost by O.R 5.5. Thus the contribution will increase by O.R 5.5. The overall cost will come down at Prime cost level as the difference occurs in the manufacturing variable cost level. Here we must understand what is a variable cost Variable costs are costs that change in proportion to the good or service that a business produce variable cost can be both direct cost or indirect cost. It can be found at Prime cost level, Factory cost level depending upon its occurrence. However the distinguishing feature about variable cost is that it varies with the level of production. As the production increase it increases and as the production level decrease it goes down. However only the total amount of variable cost changes. By its nature the per unit cost of variable cost remains same at each level of production. On the other hand we have fixed cost is the cost which does not vary amount wise but its per unit cost decrease as the production level rises and increases as the production level decreases. Fixed cost is the cost which has to be paid whether there is production or not. On basis of this criteria of direct relation to production level and the amount which need to be allocated we make following classification of the company various cost elements. We term all the cost associated with circuit making, metal covering direct labour and other direct expenses as variable this is because these expenses will occur if and only if production is undertaken. However Fixed production over head will be treated as fixed cost since its amount will not change due to a change in production level. As a result we have shown it either distribute among skilled and unskilled labour or dedicated to skilled labour cost only. This has raised the per unit cost for unskilled fixed overhead component from 1 to 2.5.We find that by purchasing circuits the company can reduce its overall cost by R.O 11000/-(65000-54000). Therefore outsourcing of circuit making is advised. However if skilled labour cost is not to be included as associated with circuit making than the decision will change. In such a case there is a gross saving of only R.O 8.5 and considering the supply cost of circuit  being R.O 15 we decide that it will increase total cost by 6.5 thus reducing our contribution margin by R.O 6.5

The method of marginal costing is more suitable when it comes to make or buy decision. The marginal costing tells us the cost which can be avoided and the cost which cannot be avoided. It helps to differentiate between the variable and fixed cost aspect of total cost. Marginal cost is the cost associated with the increase or decrease in cost due to increase in or decrease in production level by one unit of production. The marginal cost can also termed to the variable cost of one unit of production.

Scenario 2

ABC Limited Job cost Sheet for Bluetooth adopter for the 2^nd Quarter 2017

(Based on Marginal costing system)

• Here we have assumed that the batch cost for labour refers to a full batch of 200 units and not to per unit of Bluetooth.

ABC Limited Job cost Sheet for Bluetooth adopter for the 2^nd Quarter 2017

(Based on Absorption costing system)

Here we need to understand what is marginal and absorption costing technique. the definitions' for the two are as following given by CIMA

According to CIMA Terminology, Marginal Costing is defined as the "Ascertainment of marginal costs and the effect on profit of changes  in volume or type of output by differentiating between Fixed Costs and Variable Costs."

In economics, marginal cost is the change in the opportunity cost that arises when the quantity produced is incremented by one unit, that is, it is the cost  of producing one more unit of a goods -2

 According to the ICMA London "Absorption costing is a principle whereby fixed as well as variable costs are allocated to cost unit the term may be applied where production costs only or costs of all function are so allocated"-3

On analysing the cost sheet under the two methods we find that the main difference lies in the determination of Prime cost. This cost classification does not exist under absorption costing. Further it does not provide any basis to find variable cost which can be used for some important decisions. The absorption costing suffers from following limitation mainly:-

1. Comparison and control of cost is difficult as it does not provide any data regarding changes due to change in the production level.

2. It does not help in making managerial decisions such as make or buy, level of sales to achieve B.E.P, level of sales to achieve desired profit, fixation of prices

3. Under this closing stock is valued at total cost. Thus a portion of fixed cost is carried forwarded to next year and not accounted for fully in the year it occurs.

4. It lacks accuracy in determining the selling price as it takes total cost in consideration.

5. Since it charges part of fixed cost as closing inventory cost full cost relevant to the year is not charged to it and thus the revenue statement is not accurate.

In case the management had asked the selling price to be fixed on basis of variable cost it would not have been possible as there is no classification under absorption costing technique. Only marginal costing technique would have served the purpose. However marginal costing is not free from limitation. These are

1. It does not consider time factor

2. It is not always possible to differentiate cost into variable and fixed component only. There are costs which are semi variable in nature also. Part of these costs is fixed and part is variable. Further finding their proportion requires complex calculation.

3. The Marginal costing understates cost of finished goods and work in progress

4. Since closing stock is valued at variable cost the full loss on account of goods destroyed cannot be recovered from insurance company.

5. It fails to report change in manufacturing practices. I.e. impact of replacement of labour by machines.

Scenario 3

Both the FIFO and AVCO methods are the methods of inventory valuation. FIFO means first in first out. Under this method the cost of oldest inventory item is used to estimate the value of recent most sale. I actuality not the actual oldest unit is picked out" for delivery purpose, but rather the oldest value of existing stock is selected to sell the inventory. Under this method the value of the inventory in the balance sheet represents the value of the stock most recently purchased.

On the other hand is the system of Average cost (AVCO) method. This system is a combination of FIFO and Last in first out (LIFO) method of stock valuation. Under this method the available stock is valued at the average price of the total stock present. The average price is arrived at by first finding out the prices of different stock purchased at different times, adding the value of these different batches to obtain total value of all available stock an finally dividing the total value by the number of total stock present in the inventory

 When we analyse the data which has been provided to us we find that under both the FIFO and AVCO value of opening balance and purchase are the same. However the difference lies in their sales value and the value of closing stock. The question now arises which one to use. It depends upon the circumstances' of an organization to select an appropriate method of valuation. More specifically the trend of prices in purchasing of goods. In case the firm has an increasing trend as is the case is here the ideal method would be AVCO among the two. The AVCO method ensures that the quantity sold are charged at a higher rate and vice versa. This ensures we recover maximum amount of coat of goods as soon as possible.  However this also means that the available stock is being shown at a lower than that being shown by FIFO method.

Scenario 4

From the tables and charts given below we can arrive at following deductions:-

1. The table 4.1 shows that the total sale is going to 119600. The largest sale month wise is going to be on March followed by April and May. Thus three months are very important from sales point of view

2. Table 4.1 shows product wise the largest sale will take place in product product X1 and smallest in product X6.

3. The graph 4.1 shows product XI registers a constant growth whereas product X2 and X3 shows a varying but rising growth pattern and product X4, X5 and X6 show a decreasing trend over the months.

4. The chart 4.2 shows that the largest sale month wise take place in the month of March to the tune of  21% of total sales of 6 months followed by April and May accounting for 18% each. Thus the 3 months account for 57% of total sales. The month with smallest sale is February accounting for 13% of total sales.

5. The chart 4.3 shows that the product with highest percentage of sales is X1 with 22% of total sales followed by X2 with 18% of total sales. The product with lowest sale percentage is X6 with 13%.

6. Table 4.2 shows that the total variable cost amounts to 69476

7. The month with highest variable cost is march and the month with lowest variable cost is January as per table 4.2

8. Table 4.2 shows that product X1 has the largest variable cost whereas the product X6 has the lowest variable cost.

9. Chart 4.5 shows that the profit/contribution margin exist in case of X6 followed by X1 and lowest in case of X4.the overall contribution margin is 41.91 %

10. The table 4.3 and the chart 4.6 show that the month with highest contribution/profit margin is March followed by April and may. These are also the month with highest sales. The month with the lowest contribution margin is February which is also the month with lowest sales. Therefore we can say that as we increase sales the contribution/profit margin will also increase.

11. Table 4.4 shows that irrespective of month the various component of variable cost have maintained same percentage to variable cost. For the material it is 60% of variable cost, for labour it is 30 % of Variable cost and for Variable overheads it is 10 % of variable overheads.

12. In terms of sales price fact 11  can be translated into 34.85% for Material cost, 17.43% for Labour cost and 5.81 % for variable overheads. This can help to prepare cost sheet in future based on the sales information

Table 4.1 showing sales forecast for the period from January to June

Table 4.2 showing variable cost

Table 4.3 showing Profit margin for each month

Table 4.4 showing various Percentage of various component of variable cost to variable cost

Scenario 5

 The solution to these tasks lies in preparation of various budgets. To understand what is a budget we must study  its definition:-

A budget (derived from old french word bougette, purse) is a quantified financial plan for a forthcoming accounting period -4

The ZIZ company is engaged in the process of manufacturing 3 products A, B, C. Thus it is accompany with multi product line up. All of these products have different sales prices associated with them. The company needs to maintain a closing stock at end of the prescribed period so as to ensure that any demand created by the market can be met. However it uses same inputs with different products. The composition of the raw materials is different for different product. Furthermore with regard to material it is also required that different materials have certain closing stock remaining at the end of the period. The materials which are commonly required are Plastic, Aluminium and Steel. These raw materials have different opening stock and are required to be maintained as closing stock at different levels of quantity. Further each raw material has a different price rate which is to be paid for purchasing the raw material. Thereafter comes the problem of labour. Each product requires different hours of labour to be completed. Though the labour rate is uniform for all the products which are being manufactured. The ZIZ company therefore needs a system which

1. Can differentiate between different between different products in terms of their sales price and obtain total sales associated with it.

2. Provide an estimation of total production to be done on the basis of sales to be made, opening stock of various products available and closing stock which is required to be maintained at the end of the period.

3. Provide information regarding the estimated material which are going to be used for any period of time on basis of total production, opening stock of material present and the closing stock required to be maintained.

4. The firm need to have system which can help estimate the purchase in quantity as well as in price of various raw materials base on the material required, opening stock available and closing stock to be maintained.

5. Can provide information regarding the number of labour hours required to make estimated production and also estimate the payment in respect of the wages product basis and overall basis.

Thus the requirement is of a budgeting process which includes among itself the following budget:-

1. Sales Budget

2. Production Budget

3. Material Usage Budget

4. Material Purchase budget

5. & Wage Budget

Based on the information provide and the subsequent budget prepared we are able to arrive at following conclusions

1. Total units sold are 4200.

2. Total sale would be 126800

3. Estimated production would be 1190 units of A, 1610 Units of B, 1440units of C

4. Materials to be used are plastic 14160 kilos. Aluminium 8480 kilos and steel 11360 kilos

5. Required material to be purchased is plastic 14060 kilos , aluminium 8180 kilos and steel 11460 kilos. Total purchase 33700 kilos

6. Total purchase is 165900 i.e. plastic 56240, aluminium 40900 and steel 8760

7. Total labour hours required are 21370 i.e. 5950 for A, 9660 for B and 5760 For C

8. Total wages are 85480 i.e. 23800 for A, 38640 For B and 23040 for C

On basis of this information we find that the firm is suffering losses as Sales-material - labour gives us following result

Profit(loss)= sales -material-Wages= 126800-165900-85480=126800-251380=(124580)

Scenario 6

The above mentioned cash budget is based on 3 unrealistic assumptions'. These are

1. All credit sales will be fully realised.
2. All credit sales will be realised in the month designated in one lump sum and not gradually.
3. All credit purchase will have to be paid in the month due in one instalment only. the credit purchase cannot be negotiated for  breakup payment.

Our changes are:-

1. We have taken bad debt to be 5%. It will be charged on the amount of credit sales for the respective month.
2. We have taken realisation period to be 3 months with 30%, 30% and 40% breakup as part of lenient sales policy to promote sales.
3. We have presumed the creditors will give us two months period,1 month less than sales credit, with payment percentage of 60% and 40% of credit purchase in 1^st and 2^nd month following

Additional suggestions/adjustment

1.      The question does not mention month of payment of salary. So we took it in AXN case year. But if we delay payment to next month's 1^st week date it will mean we can reduce our salary payment by 4000/- for 6 months ending

2. Further we observe that too much closing balance is pending every month with AXN budget. This has two implications first this cash has cost associated with it. Second idle cash is not earning any interest. Thus we have two options we reduce capital or we reinvest part of capital in 2^nd month and earn interest from bank on it on monthly basis. the interest rate presumed is 6% annual

Option 1 reduction of capital by 50000 along with other 4 observations

Option 2 deposit of capital by 50000 along with other 4 observations

Therefore we suggest the modifications to be taken to make the cash budget more realistic. Also one thing is to be noted that if cost of capital for money deposited is more than the interest earned on it by more than double the interest rate (in our case 12% or more) than it is better to operate with less capital than use the extra cash as deposit.