Management ing: Costing And Budgeting 2n1c2k

Unit 9: MACB Individual Assignment

BTEC EDEXCDEL HND DIPLOMA IN BUSINESS (MANAGEMENT & HUMAN RESOURCES) OFFERED BY INTERNATIONAL COLLEGE OF BUSINESS AND TECHNOLOGY

UNIT 09: MANAGEMENT ING: COSTING AND BUDGETING

NAME: ADIL MUHAMMED NAZEER

BATCH NUMBER: BM-25

ICBT KANDY CAMPUS

SUBMITTED TO: MR.T.SOORIYARACHCHI

DATE OF SUBMISSION: 14th-October-2013

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Acknowledgment It is with heartfelt gratitude and appreciation I place on record the unstinted guidance of lecturer, MR.T.SOORIYARACHCHI, all my batch mates for the valuable ideas we exchanged with each other on the assignment and my parents who have been behind my every effort. Sincerely, Adil.

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:Executive Summary The various costs available for an organization to choose were briefed, including the relevant methods of costing and the .appropriate techniques needed to analyze costs

Furthermore, in relation to efficiency, the methods to reduce costs to increase value within the business were proposed, with aid to performance indicators that can be used to identify potential improvements to increase business value. Thereby, the system of budgeting and forecasting and its methods for an organization were explained and then certain budgets were created in relation to the case given. Lastly, the different types of variances were calculated, to show any adverse or favorable results, and thereby the adverse results being corrected.

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Contents Learning Outcome 1...........................................................................5 The different types of costs that an organization has to incur and the different costing methods.........................................................5 Calculation of the unit cost, selling price and profit per unit..........8 Operating statement based on marginal and absorption costing...9 FIFO method..................................................................................10 LIFO method..................................................................................11 AVCO method................................................................................12 Standard pricing method..............................................................13 Store ledger..................................................................................14 Learning Outcome 3.........................................................................15 The purpose, advantage and disadvantages of budgeting for Royal Auto Mart......................................................................................15 Fixed budgets................................................................................17 Flexible budgets............................................................................18 Zero base budgets........................................................................19 Cash budget statement of company zero.....................................20 Learning outcomes 2 & 4.................................................................22 Calculation of different variances.................................................22 Summary of cost variances...........................................................27 Sales variances.............................................................................28 Statement to show the changes from budgeted to actual profit by using variances.............................................................................29 How the organization can improve its performance for the next year...............................................................................................30 References:......................................................................................32 BM-25

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Learning Outcome 1 The different types of costs that an organization has to incur and the different costing methods There are various costs that any organization incurs and these can be classified into different types, which will be explained in a .systematic way :The product costs These are costs that are part of the cost of production of a product. These product costs can be further classified into costs that are still ,relative to the manufacturing process Direct materials cost: Costs that are directly related to the finished product and can be directed back to a specific unit, for example, leather used in car seats, therefore any costs incurred in buying and handling of these raw materials are taken into consideration as direct cost

Indirect materials cost: Costs that are not directly related to a finished product and that cannot be traced back to a specific unit. These are costs of materials that were used to the production process. For example: Stitching machinery related costs that were used to stitch out the leather used for car seats

Direct labor: Labor costs that are directly related to the manufacturing of a product in the production process. For example: The cost of the wage or salary paid to the tailors used to stitch the leather

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Indirect labor: Labor costs that are not directly related to the manufacturing process of a product, but their service is necessary for the finishing point of the production. For example, the cost of wages paid to machinery maintenance workers

Direct overhead costs: Costs or expenses related to the production of a good other than materials or labor cost. For example, the cost of factory electricity used during the production process

Indirect overhead costs: Costs or expenses that are not directly related to the production of a good other than materials and labor cost, or rather the costs incurred in bringing the finished product to the customer. For example, the cost of selling and distribution, or salaries of ants or office istration workers

:Then the period costs These are costs that are not related to the product or the production process. These are costs treated as expenses in the period in which they are incurred, such as marketing and istrative costs

There are different methods to cost ascertaining based on nature of the type of production a business has. In order to ascertain these costs correctly, they are classified into job costing, batch costing and process costing.

Job costing:

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It’s where the costs are ascertained on various sorts of jobs which have different specifications. All sorts of costs such as labor and material can be traced back to the job done. For example, 5 labors were needed to the job of producing seat leather.

Batch costing: It is where products of mostly identical nature are produced in batches. Each batch is treated as a separate job where the unit cost is the ratio of the total cost of the batch to the number of units in the batch. The cost of a batch can be averaged over the units produced. For example, in bakeries, where bread is produced in batches, where the cost of the materials needed for the bread production and the labor needed for the production of the bread will be ascertained to that particular batch.

Process costing: It is the costing ascertained to products that go through different processes during production. For example, in vehicle manufacturing, the first process is to build the chassis, then the second process is to fit the interior, third process is to paint on the chassis, and so on. The costs such as material and labor are ascertained to the process they were used for.

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Calculation of the unit cost, selling price and profit per unit Production 600000 Sales 570000 VC 35000 FC 70000 Selling & =[x2%(2*570000)] istration TC

22800 127800

Unit cost of

0.213

production Markup 40% Selling price Profit per unit (SP-TC)

0.0852 € 2.0852 € 1.8722

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Operating statement based on marginal and absorption costing

:Absorption costing € Sales Less: Cost of goods

€ 1188564 )=570000*0.213

sold Gross Profit

(121410 1067154

Less: expenses Selling and

(22800)

istration Net profit

1044354

:Marginal costing € Sales Less: Variable cost of

€ 1188564 )=570000*0.058

goods sold GP

(33060 1155504

Less: expenses Fixed and variable

(22800)

selling & Net profit

1132704 :Workings Variable cost per unit: 35000/600000 = 0.058

FIFO method

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Date Qty 6/8 6/12

500 375

Receipts Unit Amou price 2 2.2

nt 1000 825

6/18

6/22

Qty

price

500 200 700 250

2.5

Issues Unit Amou

2 2,2

nt

175 175 350

2.2 2.5

500 375 875

nt 1000 825 1825

175 250 425

385 625 1010

75

187.

1000 440 1440

625

6/30

Balance Qty Amou

385 437.5 822.5 5

Closing stock is 75 units at a price of 2.5. Therefore 75 x 2.5 = €187.5

Date Qty 6/8 BM-25

500

Recepits Unit Amou price 2

nt 1000

Qty

LIFO method Issues Balance Unit Amou Qty Amou price

nt 500

nt 1000 11


6/12

375

2.2

825

6/18

6/22

375 325 700 250

2.5

2.2 2

250 100 350

2.5 2

825 1825

175 250 425

350 625 975

75

150

825 650 1475

625

6/30

375 875

625 200 825

Closing stock is 75 units at a price of 2. Therefore 75 x 2 = € 150

AVCO method Date Qty 6/8 6/12

500 375

Receipts Unit Amou price 2 2.2

nt 1000 825

6/18 6/22

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Qty

price

700 250

2.5

625

Issues Unit Amou

2.086

Balance Qty Amou

nt 500 375 875

nt 1000 825 1825

175 250 425

365 625 990

1462

12


6/30

350

2.329

816 75

174

:Workings Unit price for qty 700 issued= [(500*2)+(375*2.2)] / 875 = 2.086 Unit price for qty 350 issued= [(175*2.08)+(250*2.5)] / 425 = 2.329

Closing stock is 75 units at a price of 2.3. Therefore 75 x 2.329 = € 174

Standard pricing method Date Qty 6/8 6/12

500 375

Receipts Unit Amou price 2 2

nt 1000 750

6/18

6/22

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Qty

price

500 200 700 250

2

500

Issues Unit Amou

2 2

Balance Qty Amou

nt 500 375 875

nt 1000 750 1750

175 250 425

350 500 850

1000 400 1400

13


6/30

175 175 350

2 2

350 350 700 75

150

Closing stock is 75 units at a price of 2. Therefore 75 x 2 = € 150

Store ledger Date 6/8 6/12 6/18 6/22 6/30

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Purchases 500 375

Issues 700

250 350

Balance 875 175 425 75

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Learning Outcome 3 The purpose, advantage and disadvantages of budgeting for Royal Auto Mart For the organization of my choice, Royal Auto Mart, budgeting plays a major role in the daily operations of the business. The business specializes in importing vehicles from external countries and focuses .on selling them within Sri Lanka The use of finance as a resource within the business is of a very critical nature, since it is not a manufacturing business. The main resource for such an importing business would be the funds and finance available in the business that is used for the purchasing and import costs. Budgeting helps the company to forecast their future potential cash inflows from sales of vehicles as well as outflows and thereby set up their financing accordingly whilst also being able to .foresee any such downturns The budgeting information can be ed through the company as a means of communication so that the different parties may adhere to .the budgeted norms and thereby avoid any feuds This may also result in individuals within the organization being able to have a set target as shown in the budgeting information which .they can follow up to and see if their resources are as budgeted There are many advantages that this organization can face through ,the use of budgeting, as mentioned earlier They will be able to control activities within the business by setting out a budget for such certain activities Employee motivation as they are able to act upon a target set by the budget, as they have employees in Sri Lanka and externally A core budget could link all departments or branches of that single organization BM-25

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Resource allocation, or rather, finance allocation will be more efficient within the business They can review their profitability, as budgeting helps them to forecast their inflows and compare them with outflows They can review their assumptions through forecasting for different periods The allocation of cash for different activities such as daily operational activities or even large scale cash allocations such as the cost of importing and purchasing vehicles They may be able to find a huge downturn when budgeting. For example, the company can look into places bringing about the largest outflow and seek ways to correct them

,However, budgeting may also prove heinous for such organizations For a company that runs resources in many countries, this may result in conflicts between individuals or managers, since the finance allocation as per the budgeting information may not be .accepted by the two parties Although employees may make use of budgeting to attain targets, they may see it as a pressure point on their activities, fearing that they may not achieve it Since these are forecasts, the costs or values may be over estimated or under estimated, thereby not giving a realistic view for the company Any such forecasting values that arise wrongly, may result in wrongful allocation and may either be wasted or under funded

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Fixed budgets A fixed budget is established for a specific level of activity and is not adjusted to the actual level of activity attained at the time of .comparison between the budgeted and actual results

Naturally, a fixed budget is established only for a short period of time where the budgeted level of activity is expected to be attained to the maximum possible extent. It is more suitable for fixed expenses, i.e. the expenses which have no relation with the level of .activity Budgets remain the same regardless of the activity level actually .that takes place within the organization It is not adjusted with the actual activity taking place, meaning that the budget remains the same whether the actual activity level .increases or decreases .This sort of budget is prepared for a specified level of activity It may be of importance to a company as they will be able to control the costs within the business using this form of budget, as they will .try to keep costs within the fixed budget However in comparison to other forms of budgets, the fixed budget is less efficient when it comes to budgeting, as this only provides a basic outline to follow and does not take into consideration any .possible changes

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Flexible budgets - These budgets are designed to change in relation to the level of

activity attained within the organization. - They are prepared for a range of activities. - The flexibility is due to the reason that it recognizes the behavior of costs such as fixed and variable costs. - It helps in the facilitation to measure and control performance.

It can be important to a company because it enables a company to view realistic and reliable information on the forecasted data in comparison to the actual results. This means that it provides much higher cost control over a business function and makes it more aggressive.

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Zero base budgets - Budgeting starts from zero which means that, in simple words, the total income minus the total expense equals zero. - The budgeting done for each period is started and formulated from zero, meaning that past information will not influence the budgeting process being done. - All activities are evaluated each time a budget is formulated and every item of expenditure in the budget is fully justified.

This would be important for the company due to many reasons. - The resource allocation is carried out more efficiently - It avoids any form of over budgeting - Also avoids any wastages of resources - While budgeting this way, more cost effective ways to improve operations may be found

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Cash budget statement of company zero Ma

Jun

y

July

Aug

e

Sep

ust

t

Openin

500

5300

6575

9700

1156

.g bal Sales

00 100

0 6000

0 4000

0 1000

00 1240

00 600

2500

1500

0 1860

0 1650

0 8400

0 3100

0 2750

0 3000

0

0

0 1531

0 1745

00

00

00

Insuran

1000

ce

0 1257 50

Purchas

112

375

5000

750

es

50

0 150

2250

0 300

00

0

00

4000

400

3000

0 300

3000

0 300

Wages

40

400

400

Overhe

00 30

0 300

0 300

00

0

0 300

ads Tax

0

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0

)

)

)

)

)

700

1825

2875

3750

4750

(0

(0

(0

(0

(0 21


Balance

530

6575

9700

1156

1270

00

0

0

00

00

Workings: (Receipts from sales and payments for purchases)

Sales (on month) Sales (2nd month) Sales (3rd month)

Sales (on Sales (2nd Sales (3rd Purchases (on Purchases (next

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month) month) month) month) month)

May x 50% = 10000 20000 x 30% = 6000 20000 x 20% = 4000 20000

x 50% = 25000 x 30% = 15000 x 20% = 10000 x 75% = 11250 3750 = 11250 –

June 50000 50000 50000 15000 15000

July 62000 62000 62000 20000 20000



x 50% = 31000 x 30% = 18600 x 20% = 12400 x 75% = 15000 5000 = 15000 –



August x 50% = 27500 55000 x 30% = 16500 55000 x 20% = 11000 55000 x 75% = 22500 30000 7500 = 22500 – 30000

Sales (on Sales (2nd Sales (3rd Purchases (on

month) month) month) month)

x x x x

50% 30% 20% 75%

= = = =

September 30000 60000 18000 60000 12000 60000 30000 40000 22


Purchases (next month)

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10000 = 30000 – 40000

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Learning outcomes 2 & 4 Calculation of different variances Operating profit variance Budgeted Sales Less: COS Contribution Less: FC Operating profit

180000 (150000) 30000 (15000) 15000

Actual Sales Less: COS Contribution Less: FC Operating profit

180200 (157600) 22600 (15600) 7000

Direct material variance

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Price variance= (Actual qty x std cost per unit) – Actual cost 11600 – (x 0.2 55000) = 11600 – 11000 = Adverse (Actual price is higher than the 600 = standard price by this amount)

Cost variance= (Std cost x Std qty) – Actual cost 11600 – (x 10600 1) = 11600 – 10600 = Adverse (Actual cost is higher than the 1000 = standard cost by this amount)

Usage variance= (Actual qty used – Std qty for actual prod) x Std cost x 0.2 (55000 – 53000) = x 0.2 2000- = Adverse (Actual qty usage is higher than 400 = the standard qty usage)

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Direct labor variance Rate variance = (Actual rate per hour – Std rate per hour) x actual hours worked x 41300 (1.50 – 1.52) = Adverse (Actual rate is higher than the 826 = standard rate by this amount)

Cost variance = (Std rate per hour x Std hours) – Actual labor cost 63000 – (x 10600 6) = 63000 – 63600 = Favorable (Actual labor cost is less than 600 = standard labor cost)

Efficiency variance = (Actual hours – Std hours for actual production) x Std rate per hour x 1.5 (42400 – 41300) = x 1.5 1100 = Favorable (Actual hours worked is less 1650 = than the budgeted hours)

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Variable overhead variance Cost variance = Actual variable exp – (Std hours x Variable prod overhead absorption rate) (x 2 42400) – 83000 = 84800 – 83000 = Favorable (Actual cost is lower than the 1800 = budgeted cost)

Efficiency variance = (Std hours – Actual hours) x Std rate per hour x 2 (41300 – 42400) = x 2 1100 = Favorable (Actual variable o/h is lower 2200 = than the budgeted)

O/H expenditure variance = (Std var o/h rate – Actual var o/h rate) x actual hours allocated x 1 (83000 - 82600) = Adverse (Actual var o/h rate is 400 = higher than standard)

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Fixed overhead variance O/H expenditure variance = (Actual fixed overheads – Std fixed overheads) (15000 – 15600) = Adverse (Actual fixed costs are 600 = higher than budgeted)

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Summary of cost variances Direct material variance Price Cost Usage

600 1000 400

Adverse Adverse Adverse

826 600 1650

Adverse Favorable Favorable

Direct labor variance Rate Cost Efficiency

Variable overhead variance Cost Efficiency Expenditure

1800 2200 400

Favorable Favorable Adverse

600

Adverse

Fixed overhead variance Expenditure

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Sales variances Volume = (Actual qty – budgeted qty) x Std profit per unit (std contribution) x 3 (10000 – 10600) = x 3 600 = Favorable (Actual sales volume is higher than 1800 = budgeted)

Price = (Actual sales price per unit – Std sales price per unit) x Actual sales qty x 10600 (18 – 17) = Adverse (Actual price is less than the budgeted 10600 = price) Working for actual sales price per unit = (total actual sales / qty) = (10600 / 180200) = 17

Overall variance

Sales price var Less: cost Material price var Labor price var Variable o/h exp var

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(10600) 600 826 400

(1826) Adverse 12426

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Statement to show the changes from budgeted to actual profit by using variances

Direct material

Adverse 600

price var Direct material

400

usage var Direct labor

826

rate var Direct labor eff var Variable o/h

var Sales price var Sales vol var

Value

1650 400

exp var Variable o/h eff var Fixed o/h exp

Favorable

2200 600 10600 13426

1800 5650

(7776)

Therefore actual profit = 15000 – 7776 = 7224

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How the organization can improve its performance for the next year Through the analysis of all the calculated variances, the organization has favorable as well as adverse variances. As calculated above, the organizations direct material variances are all adverse, meaning generally that the actual values are greater than the budgeted values, and this means that the organization has to try to keep its actual variances lower than its expectations. The price, cost and usage variance for material are all adverse. Adverse price variance means that the material prices are greater than the prices the organization budgeted for. In order to overcome this problem, the organization may have to look to achieve lower prices for its raw materials, this can be either by finding a cheap supplier, or by purchasing in bulk. The same can be done to tackle the cost adversity of materials for the organization. The usage of materials is also adverse, meaning that there is wastage of materials. This is due to the actual usage of materials being greater than what they had budgeted for, meaning that they are not efficient enough and are using more materials than required, which in turn brings up the cost of materials as well.

Out of all of its labor variances, the organization has been well managing its labor cost and efficiency, meaning that labor cost is lower than budgeted and there is a productive and efficient workforce for the organization. However, the labor rate variance is adverse. This means that the actual rate for labor that the organization offers is lower than what was supposed to have been. This can be a sign of potential future demotivation of the labor force, which in turn can affect the BM-25

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efficiency. Therefore, to improve its performance, the company will have to try to increase the labor rate per hour all the way upto its budgeted level or higher than that to achieve maximum efficiency.

Out of all its variable overhead variances, the organization has done well in managing the cost and efficiency of its variable overheads. Meaning that it has managed to keep its variable overhead costs lower than what It budgeted for. However, variable overhead expenditure is adverse, meaning that it spends more on variable overheads than what it expected for, although it managed to keep the costs of variable overheads low. In order to overcome this, the company will have to further reduce spending on variable overheads than what it allocated its budgets for.

Finally, the fixed overhead expenditure variance of the organization is adverse, meaning that it spends more to cover up fixed costs than what it had budgeted for. This expenditure may mean that the organization spends on costs such as salary, rent or insurance. Therefore, in order to improve its performance, the organization can cut down its spending on such units. As a recommendation, they can look into the reduction of certain workers salaries, or downsize its workforce, and may also look to rent out cheaper places or cut down on its insurance payments. However, doing so may result in other variables getting effected, such as the labor variances due to the adjustments of the fixed overhead variance.

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:References lecturers

aspiration

(n.d)

Resource

information

and

BTEC

assignments [online] [accessed 19th October 2013]. Available at: http://www.lecturersaspiration.com/2012/03/managementing-costing-and.html slideshare (n.d) Absorption and marginal costing [online] [accessed 18th

October

2013].

Available

at:

http://www.slideshare.net/rish10/absorption-and-marginal-costing principlesofing (n.d) Chapter Nineteen: Job Costing and Modern Cost Management Systems [online] [accessed 17 th October 2013].

Available

at:

http://www.principlesofing.com/chapter19/chapter19.html

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