Management accounting costing and

budgeting
Accounting is key success of business but the word accounting is more sophisticated is in case
of business. Almost every business before dealing any project or any other important function it
should be design an appropriate budget. To make budget first we should thinking about the cost
because the cost of the production is always variable. A well-planned budget will bring success
for a project. In my academic case study, I have to make a budget for Rayners plc. Company,
which is a renowned company in the UK.
Cost classification:P1
In the managerialaccounting the word cost is using various ways.The main reason is that there
are many types of costs, and these costs are classified differently according to the certain
management process. For example, managers may want cost data to prepare external financial
reports, to prepare planning budgets, or to make decisions. There are some relevant costing
methods according to the task:

This essay is an example of a student's work

Disclaimer
This essay has been submitted to us by a student in order to help you with your studies. This is
not an example of the work written by our professional essay writers.
Who wrote this essayBecome a Freelance WriterPlace an Order
Direct/Indirect cost: Direct cost is a cost where everything counting easily and conveniently
traced to the particular cost object. But it is not incurred due to the product or activity countless.
On the other hand indirect cost is fully reverse of the direct cost where counting process is more
sophisticated and inconvenience and it incurred even productivity or activity change.
Prime cost: The cost normally counting for labour and material to make product. This cost
depend on ability and capacity of the labour that how much performed they are to make
production and which way is the best way to use material.
Fixed cost: A cost which is not only related to production is called fixed costs. In other words, it is
a cost that remains constant even with variations circumstances and situations.
VARIABLE COST: Variable costistotally opposite word of fixed cost. When a cost which is varies
exactly in proportion to the change in activity (production or sale) would be term as variable cost.
This is sometime called engineering cost or a formula cost and can be calculated in advance.
Full Absorption cost: A managerial accounting cost method of expensing all costs associated
with manufacturing a particular product. Absorption costing uses the total direct costs and
overhead costs associated with manufacturing a product as the cost base. Generally accepted
accounting principles (GAAP) require absorption costing for external reporting.

Costing methods: (P2)

According to the marginal cost, another name of fixed cost is period cost that means one need to
deduct the total cost from contributions where under absorption costing, fixed cost is part of unit
cost/production cost.
Therefore deduct the total FC from contributions. Fixed cost does not change at any level of
activity.
F.O.A.R =

Budget O/H

Budget Activity
(Note that if budget is equal to Actual production, then the absorption will be same). Now, if we
will analyse the information and data as a case study of Rayners plc.
Year 1 Marginal Costing method:

108,000
Sales: 90,000 X 12
Less cost of production
Opening Inventory
Add productions (100,000 X 5)

0
500,000

500,000
Less closing Inventory (10,000X5)

- 50000

450,000
Contribution

630,000

Less Total FC: Production

(270,000)

Admin Costing

(20,000)

Net Profit

340,000

Year1Absorption costing method:

108,000
Sales

(90,000X12)

Less cost of production

Opening Inventory
Add production (100,000X5)

0
800,000

800,000
Less closing Inventory (10000X8)

(80,000)

Cost of production

(720,000)

Gross profit

360,000

Over absorbed (10,000X3)

30,000

Less admin cost

(20,000)

Net profit

370,000

Reconciliation statements:

Absorption profit

370,000

Les increase in Inventory

(Closing inventory opening inventory)
Multiply by F.O.A.R
(10,000 0) X 3

(30,000)

Marginal profit

340,000

Year2 Marginal costing statement:

Sales (110,000X 12)

132,000

Less cost of production

Opening Inventory (10,000X5)

50,000

Add production

550,000

(110,000X5)

600,000
Less Closing Inventory (10000X5)

(50,000)

550,000
Contribution

770,000

Less total FC: Production

(270,000)

Admin

(20,000)

Net Profit
Year 2

Absorption costing statement:

480,000

Sales

132,000

Less cost of production

Opening inventory (10000X8)
Add production (110,000X5)

80,000
800,000

900,000
Less closing Inventory (10,000X8)

80,000

(880,000)
440,000
Over absorption (20,000X3)

60,000

Less admin cost

(20,000)

Net profit
Year 3

480,000

Marginal costing statement:

Sales (750,000X12)

1140,000

Less cost of production

Opening inventory (10,000X5)

50,000

Production

450,000

(90,000X5)

500,000
Less closing inventory (5000X5)

25,000

(475,000)
Contribution

665,000

Less total fixed cost: Production

(270,000)

Less total fixed cost: Admin

120,000

Net Profit
Year 3

375,000

Absorption costing statement:

Sales
Less cost of production

140,000

Opening Inventory (10,000X8)

80000

Add production

720,000

(90,000X8)

800,000
Less closing inventory (5000X5)

40,000

(760,000)
Gross Profit

380,000

Less Admin

(20,000)

Net profit

360,000

Reconciliation Statement:
Absorption profit

360,000

Add decrease in inventory

(5000-10000) X 3

15,000

Marginal profit

375,000

Unit cost: (P3)

According to the data of the Rayners plc and using the marginal costing method the unit cost is:
Direct material
Direct labour

2
1

Prime Cost

VC/Unit

Marginal cost

So according to the marginal cost the value of each unit will be 5.

F.O.A.A (unit)

Absorption cost

Full cost/Total cost

FOAR

Budgeted F/C

Budgeted Of Level Activity= X/90000 =3

X=270000 (Budgeted Of Overhead
Collect analyse and present data using appropriate techniques. (P4)
In the management accounting there are different ways to collect data for the business.

This essay is an example of a student's work

Disclaimer
This essay has been submitted to us by a student in order to help you with your studies. This is
not an example of the work written by our professional essay writers.
Who wrote this essayBecome a Freelance WriterPlace an Order
The basic role is the participants a taste of the various tools and techniques available for
collecting monitoring and evaluation data. Participants focus on what makes a good
questionnaire and discuss tips on how to conduct interviews and focus groups. Participants also
have the opportunity to explore more visual, participatory tools so that they can choose which
methods are most appropriate for collecting information from their particular stakeholders.
Moreover, the source of information that means the entire item for particular enquiry. E.g.
invoices, customers and to show these customers feedback those are will be taken into
consideration for further used of data collected. Another important technique to analyse and
collect data is various sampling such as:
Random sampling: This is the purest form of probability sampling. Because due to the large
group of population it is really difficult and not possible to identify every member of the
population, so the pool of available subjects becomes biased.
Systematic sampling: It is often used as a random sampling. Another name of the sampling is
selection technique. Its only advantage over the random sampling technique is simplicity.
Systematic sampling is frequently used to select a specified number of records from a computer
file.
Convenience sampling: It is used in exploratory research where the researcher is interested in
getting an inexpensive approximation of the truth. As the name implies, the sample is selected
because they are convenient.
Judgment sampling: One common non probability method isJudgment sampling. The researcher
selects the sample based on judgment. This is usually and extension of convenience sampling.
Quota sample: This is a sample method where items, usually people, are selected in a given
quantities and according to pre-defined characteristics.
These different methods are used for different purpose where user must identify a sampling
method in order to review the presentation at the intention. These methods can also be used in a
wide range of area and activity where there is lots of member with different types of users.
Routine cost report: (P5)
The report generally include the financial performance for the end of the year .E.g. Profit, Debit,
share, price and dividends. It will also advice about transfers to reserves, assets that have been
acquired or disposed of the names and shareholding of directors active in the last year, and other
business activates that will be interested to stakeholders. Even, sometimes the report also cover
the business polices on employment, training, welfare, creditor, creditor payment and corporate
responsibility as well. There are some different ways to finding cost report:
Monitoring Cost: Cost monitoring means supervising the economic progress in the management
system in the business. This is the main reason of cost or expense monitoring is collecting
information to check performance against an expectation.

Controlling: Cost controlling is process where the common goal of the management is improving
business cost-efficiency by reducing costs, or at least restricting their rate of growth. Businesses
use cost control methods to monitor, evaluate, and ultimately enhance the efficiency of specific
areas, such as departments, divisions, or product lines, within their operations.
Planning: It is called a plan make supreme success. In term of business it is invincible part to
make appropriate costing plan.It comprises iterative quantification and costing, derived from
benchmarking and market exploration exercises, and is aimed at establishing a realistic and
acceptable cost limit. This information is critical for obtaining project financing and for
determining whether a project can be profitable or not. Without cost planning, property owners
would enter blindly into construction projects and possibly into insolvency.
Evaluation: Evaluating the cost of the overall business management is really sophisticated task.
According to the business activity there are three types of evaluation specification:
Background: Background means description, context, scope and objective of the business.
The Selection Process: Analyse briefly the selection process, starting with the advertising the
establishment of the shortlist, expressions of interest, and withdrawals of firms before proposal
submissions.
Technical evaluation: Describe briefly the meetings and actions taken by the evaluation
committee formation of a technical evaluation team, outside assistance, evaluation guidelines,
justification of sub criteria and associated weightings as indicated in the Standard Request for
Proposals; relevant correspondence and compliance.
Profitability Ratio: (p6)
1)Gross profit margin =gross profit/sale*100 = xf

This essay is an example of a student's work

Disclaimer
This essay has been submitted to us by a student in order to help you with your studies. This is
not an example of the work written by our professional essay writers.
Who wrote this essayBecome a Freelance WriterPlace an Order
2)Net profit margin = PBIT/sales*100 = xf
3) Retained on capital employed = PBIT/capital employed*100 = xf
4) Assets= sales/capital employed = x times
Efficiency ratio:
Lido ltd

New ltd.

Assets = 640/350+75
=1.5 times
Productivity

Assets=1600/1600+20
=.987

Unit produce for employees

20000/34 =588 unit

5000/78=64.1

Operating profit margin

128/640*100=20

256/1600*100 =16

Cost productivity
Operating profit per employee
128/34 =3.77

256/78=3.28

Principles of quality: (P7)

The basic principle of Total quality management is that costs of prevention are less than the
costs of correction. There are various types of roles are involved in term of quality:
Assurance: Quality assurance focuses on preventing faulty occurring, instead of fixing them
afterwards (which is the quality control approach). Describe everything to find out the causes of
defects are identified and ways to fix the system to make sure the problem doesnt happen again
are agreed.
Reliability: The most important and valuable principles of quality are consistency and reliability.
Each link in the quality chain must deliver to the next link on time, in the quantity ordered, to the
right specification and at the agreed price, time after time after time.
Customer-driven: customer driven quality means many things to many people, in the end it is the
customers opinion that counts. In these cases the customers quality ideals must be met every
step of the way from the farm to the marketplace.
Continuous Improvement: This is an essential part of any good quality system. The market
environment for popular product is always changing and highly competitive, so the popular
programme must constantly evolve to ensure the industry stays ahead of the completion.
Principles of value:
Implementing the Principle of Value requires leadership and management with particular,
conscious focus and intent.It is always to develop and sustain durable, value-driven, win-win
relationships. Everything can be evaluating by relative activity such as Products for payment
Salary for performance Investment for profits. Everywhere we look, we see win-win relationships
as the core of durable success. If we lose those relationships, we eventually lose everything.
Another important principle is core value which is completely design by roles of fairy, ethos,
human morality, dignity, and customer service. If an organization does not cause its members to
understand and focus on these important elements, it will soon find participants becoming solely
"profit-centric." This behaviour inevitably leads to a short-term focus and potentially illegal
practices that provide the seeds of self-destruction. Remember that management is to build
business value by making the right decisions; and, decisions about core values are essential.
Purpose and nature of Budget: (P8)
Budgeting is a basic and essential process in a business which allows businesses to gain many
goals in one course of action.The budgeting process may be carried out by individuals or by

companies to estimate whether the person/company can continue to operate with its projected
income and expenses. There are several purposes to create and implement a budget include
control and evaluation, planning, communication, and motivation.

Control and Evaluation

This is most important matter after finalized a
budget is providing sufficient control and
evaluating its performance.If performance
does not meet the budget, action can be
taken immediately to adjust activities.
Budgeting allows a company to have a
certain range of control over costs, such as
reducing many types of unnecessary
expenses or assigning responsibility for
these expenses. A budget also gives a
company a benchmark by which to evaluate
business units, departments, and even
individual managers. Unfortunately this
purpose of budgeting may be effect on
employees to have negative thinking about
the budgeting process because their
compensation and, in certain situation, even
their jobs may be operating on meeting
certain budgeting target.
Planning
Planning is initial purpose of budgeting. It is also design by decisions, and many questions must
be answered. Besides that, budgeting allows a business to take stock of revenue and expenses

from the previous period, and judge where the business will be in future periods. It also allows
the organization to add and remove products and services from its plan for the future period.
Communication and Motivation:
Other goals that an organization may use its budget to achieve that are less obvious include
communication and motivation. It is important that make correlation according to the chain of
command like from management level to supervisor level, this is only to gain mentally
satisfaction of the staff. When an employee is involved in creating his or her departments
budget, that person will be more likely to strive to achieve that budget. Budgets also allow a
company to motivate its employees by involving them in the budget.
Budgeting method: (p9)
A budget is an individual and written estimate of how an organization or a particular project, or
business unit willperform financially. If we can accurately predict our company's performance
than we will be certain that resources such as money, people, equipment, manufacturing plants,
and the like are deployed appropriately. There is various kind of budgeting are available for a
business such as:

This essay is an example of a student's work

Disclaimer
This essay has been submitted to us by a student in order to help you with your studies. This is
not an example of the work written by our professional essay writers.
Who wrote this essayBecome a Freelance WriterPlace an Order
Cash budget:An important estimate of a company's cash position for a particular period of time. .
Labor budget: The total cost for labor to be expended for a set period of time calculated by taking
every persons position in an organization, department, or project and multiplying the number of
hours they are expected to work by their wage rates.
Sales budget: An estimate of the quantity of goods and services that will be sold during a specific
period of time.
Production budget: A forecast thatstarts with the sales budget's estimates of the total number of
units projected to be sold, then translates this information into estimates of the cost of labor,
material, and other expenses required to produce them.
Expense budget: An estimate prepared for travel, utilities, office supplies, telephone, and many
other common business expenses for a given period.
Incremental Budget:
These types of budget are normally starts with previous periods budget or actual results and add
an incremental amount to cover for inflation and other known changes.
Advantages of incremental budgeting
The budget is stable and change is gradual.

 Managers can operate their departments on a consistent basis.

The system is relatively simple to operate and easy to understand.
The impact of change can be seen quickly.
Disadvantages of incremental budgeting
Assumes activities and methods of working will continue in the same way.
No incentive for developing new ideas.
No incentives to reduce costs.
Encourages spending up to the budget so that the budget is maintained next year.
The budget may become out of date and no longer relate to the level of activity or type of work
being carried out.
Zero-based budget:
This is a traditional technique of planning and decision-making which reverses the working
process. By contrast with incremental budgeting, in zero-based budgeting, every department
function is reviewed comprehensively and all expenditures must be approved, rather than only
increases.
Advantages
Drives managers to find cost effective ways to improve operations.
Detects inflated budgets.
Useful for service departments where the output is difficult to identify.
Increases communication and coordination within the organization.
Identifies and eliminates wasteful and obsolete operations.
Identifies opportunities for outsourcing.
It responds to changes in the business environment.

Disadvantages
It emphasize short-term benefits to the detriment of long term goals
The budgeting process may become too rigid and the organisation may not be able to react to
unforeseen opportunities or threats
Difficult to define decision units and decision packages, as it is time-consuming and exhaustive.
Forced to justify every detail related to expenditure. The R&D department is threatened whereas
the production department benefits.
According to the previous discussion it is clear that Zero-based budgeting is must be clearly
understood by managers at various levels to be successfully implemented. But every

organisation should provide Necessary training to manager. According to the case study there
are four types of budgets will be explaining.
selected budget: (P10)
Production Budget:
Clockwork
Wind-up train
Sales unit
450
550
+ Closing Inventory
30
40
480
590
- Opening inventory
(20)
(50)
Production
460
540
Material Usage Budget:
Clockwork
Wind-up train
Production (units)
460
540
Usage per unit
X
2kg
x
1kg

Total Material usage

920
540
Material purchase Budget:
Clockwork
Wind-up train
Material usage
920
540
+ Closing Inventory
60kg
60kg
980
600
- Opening Inventory
(50)
(50)
930
550
Cost per unit
5.00
5.00
4,650
2,750
Labour Budget:
Clockwork
Wind-up train
Production
460
540
Direct labour 18/60

0.3
0.5
138
270
Direct labour/hr
X
8
x
8
1,104
2,160
Cash Budget: (P11)
Clockwork
Wind-up train
Demand Qty
450
550
Selling price/Unit
X
40
x
40
18,000
22,000
Clockwork
Wind-up train
Total
Sales
18,000
22,000
40,000

Total Revenue
18,000
22,000
40,000
Therefore half of sales. (40000/2)
20000
Expenditure
Material

-------------Labour
1,104
2,160
(3,264)
5,754
4,910
16736
Surplus/Deficit
12,246
17,090
16736
Balance B/F
5,000
21736
Calculate a variance, identify possible causes and recommend corrective action: (p12)
Actual result
Flexible budgets

Actual production units

8900 units
8900 units
3255A
direct materials
163,455
160,200
Direct labour
224,515
222,500
2015A
Variable overhead
87348
89000
1652F
Fixed overhead
134,074
133500
574A
total
609,392
65200
4192A
Calculatuin of Variences:
1)

Total material variances

a)

Price variance

Actual cost of material =

163455

This essay is an example of a student's work

Disclaimer
This essay has been submitted to us by a student in order to help you with your studies. This is
not an example of the work written by our professional essay writers.

Who wrote this essayBecome a Freelance WriterPlace an Order

Budgeted cost of material
(Actual cost standard cost)
35464 4.5=

(159588)

3867 A
b) Usage variance
Actual usage =

35464 kg

Budgeted=
(Actual output standard usage)
8900 4kg)

(35600)

136 F
standard cost / kg

4.50

612 F
3867
612
3255 is the variance
2) Labour variance
a)

Price variance

Actual cost of labour =

224515

Less (actual hours worked standard cost/ hour)

44400 5

= (227000)

2485 F
b) Idle time variance
Idle time hrs.
Standard rate /hour

1300
5

6500 A
c)

Efficiency variance

Actual hours worked

= 44100

Less standard hours

(Output standard)
8900 5

= (44500)

400F
Standard cost per hour

2000F
3) Total variable cost variance
a) Actual variable cost

87348

Less (actual hours worked standard cost /hour

44100 2)

(88200)

852 F
b) Efficiency variances
Actual hours worked

= 44100

Less standard hours

(44500)

400F
standard cost per hour

800 F
4) Fixed overhead variance
a) Expenditure variance
Actual overhead

=134074

Less budgeted overhead FOAR per unit

(8700 5) = 43500 3 =

(130500)

3574 A
b) Volume variance
Budgeted output

= 8700

Less actual output

8900

200F
FOAR/ unit

15

3000F
Volume variance
1)

Capacity variances

Budgeted hours 43,500

(-) actual hours
600F

44,100

2) efficiency variance
actual hours
(-) standard hours
400 F

44100
44500

 FOAR per hour

FOAR

1800F

1200F

Sales variances
Sales price variances

Actual sales

613,200

Budgeted sales (8400 75)

630,000

16,800 A
Sales volume variance
Actual units sold

8400

Less budgeted units

8000

400 F
budgeted profit per unit

2800F
Reconciliation Statementm (P13)
Budget profit 8000units x 7/unit

56000

Sales variance
Price variance 16800 A
Volume variance

2800 F

(14000A)
42000
Cost Variance

DM Price variance
DM Usage variance
DL Price variance

3897
612
2485

DL Idle variance
DL Efficiency variance
V/C Price variance
V/C Efficiency variance
F/O Expenditure variance

6500
2000
800
852
3574

F/O Capacity variance

1200

F/O Efficiency variance

1800

Actual profit

13941

(4192)
37808

Reporting Variances: (P14)

Like any reprted infor mation, Variance analysis result should be passed on to the appropriate
manager as soon as possible. In organisations practising management by exception, only those
variances above a certain size are reported, avoiding time wasted reporting and acting on
relatively trivial Items. If we analyse and scrutinize the written budget of the Reynars plc
according to the provided information and data then we will be able to submit a report to the
management section. There are approximate reports for the budgets are supplied bellow:
Possible Causes
Material variance: In term of Material variance the material was used less than proposed and
parched for the specific production. This result is important and profitable for zero based
budgets.
Labour Variance: It is matter of concerned for every types of budget because profit of the
business or organisation depends on labour or worker and they are sometimes affected by silly
reason. Anyway, in the budget we found one problem is abuse of time that means lake of idle
time this may be result of mechanisms or management inefficiency.
Variable cost variance: The total variable cost variance was less 852F than the budgeted actual
cost variance. This is aconcept of profit of the business.
Fixed overhead variance: In the scenario of fixed overhead variance the company use more
money than it proposed budget on fixed product like rent or may be the price of the rent rise up.
Sales variance: This is a core point of the company thatto get expected sales result. In the
budget, although it is not too much matter of concern that company does not get accurate sales
of product that they expect.
Recommendation:
It is not possible for any business budget or project budget to get expected result in every
department. This is because of internal, external even sometime natural effect of the budget. But
an idol budget depends on how much success it gains from the proposal budget. A common role
of evaluating budget is profit but I think profit not only subject if other related object get accurate
result then profit will be certain. However, after investigating this budget, I will recommend that
although it does not get 100% success but it is idle budget.

Find out more from UK Essays here: http://www.ukessays.com/essays/accounting/managementaccounting-costing-and-budgeting-accounting-essay.php#ixzz3KMwE2Vyv