Management Accounting - Assigment 2

BANKING ACADEMY, HANOI BTEC HND IN BUSINESS (FINANCE) ASSIGNMENT COVER SHEET NAME OF STUDENT REGISTRATION NO UNIT TITLE ASSIGNMENT TITLE ASSIGNMENT NO NAME OF ASSESSOR ASSIGNMENT ISSUE DATE SUBMISSION DEADLINE Unit 9: Management Accounting: Costing and Budgeting Budgetary Planning and Control of Mr JUN ALEJO BATHAN 04 December 2011 06 February 2011 We, hereby confirm that this assignment is our own work and not copied or plagiarized from any source We have referenced the sources from which information is obtained by us for this assignment Members Full Name English Name Signature Date FOR OFFICIAL USE Assignment Received By: Date: Unit Outcomes Outcome Prepare forecasts and budgets for a business (3) Monitor performance against budgets within a business (4) Evidence for the criteria Feedback Assessor’s decision Explain the purpose and nature of the budgeting process a Select appropriate budgeting methods for the organisation and its needs b Prepare budgets according to the chosen budgeting method c Prepare a cash budget d Calculate variances, identify possible causes and recommend corrective action a Prepare an operating statement reconciling budgeted and actual results b Internal Verification Evidence for the criteria Outcome Assessor’s decision Feedback Report findings to management in accordance with identified responsibility centres Internal Verification c Merit grades awarded M1 M2 M3 Distinction grades awarded D1 D2 D3 Comments by Assessor - Common Skills A B C D E F G Assignment ( ) Well-structured; Reference is done properly / should be done (if any) Overall, you’ve Areas for improvement: ASSESSOR SIGNATURE DATE / / DATE / / NAME: (Oral feedback was also provided) STUDENT SIGNATURE NAME : FOR INTERNAL USE ONLY VERIFIED YES NO DATE : VERIFIED BY : NAME : COMMON SKILLS & COMPETENCIES ASSESSED (indicated by X) A MANAGING & DEVELOPING SELF D MANAGING TASKS & SOLVING PROBLEMS Managing own roles & responsibilities 12 Use information sources Manage own time in achieving objectives 13 Deal with a combination of routine & non-routine tasks Undertakes personal and career development 14 Identify & solve routine & non-routine problems Transfer skills gained to new/changing situations & contexts B WORKING WITH & RELATING TO OTHERS E APPLYING NUMERACY Treat others beliefs and opinions with respect 15 Applying numerical skills and techniques X Relate & interact effectively with individuals & groups Work effectively as a team member F APPLYING TECHNOLOGY C COMMUNICATING 16 Use a range of technological equipment and systems Receive and respond to a variety of information G APPLYING DESIGN AND CREATIVITY Present information in a variety of visual forms X 10 Communicate in writing 11 Participate in oral & no-verbal communication 18 Use a range of thought processes X Title Page Management Accounting Transmitted to: Mr Jun Alejo Bathan Prepared for: Mr Jun Alejo Bathan (Lecturer) Unit 9: Management Accounting Banking Academy, Hanoi BTEC HND in Business (Finance) Prepared by: Triple F Group Phạm Minh Hoàng – Peter, F03C-065 Đỗ Ngọc Vương Anh – King, F03D-007 Lê Hoàng Long – Dragon, F03D-099 Hồ Ngọc Minh – November, F03D-111 Nguyễn Ngọc Thiện – Unstoppale, F03C- 137 Executive Summary As a role of a management accountant of a group of companies and the managing director has asked to explore the possibilities of introducing appropriate budgeting methods is one of the operating companies Base on the information which is given in the scenario, this report will cover the following tasks: • Explain the purpose and nature of the budgeting process which should normally be taken • • • • • • in the preparation of budgets in a manufacturing company Select appropriate budgeting methods for the organization and its need Prepare budget according to the chosen budgeting method Prepare a case budget Calculate variances, identify possible causes and recommend corrective action Prepare an operating statement reconciling budgeted and actual results Report findings to management in accordance with identified responsibility centers Table of Contents Evidence for the criteria B WORKING WITH & RELATING TO OTHERS E APPLYING NUMERACY F APPLYING TECHNOLOGY C COMMUNICATING G APPLYING DESIGN AND CREATIVITY Executive Summary Table of Contents Introduction Main body .9 3a – The purposes and natures of the budgeting process 3a.1 Budget and the importance of budget 3a.2 The purposes and benefits of a budget .10 3a.3 Steps in the preparation of a budget 11 3a.4 Preparing functional budgets 12 3a.5 Cash budget 13 3a.6 Budgeted profit and loss account and balance sheet 13 3a.7 Flexible budgets 14 3a.8 Cost estimation 14 3a.9 Computers and budgeting 15 3a.10 Incremental and zero based budgeting system 15 3a.11 Budgeting, performance and motivation 16 3b - Select appropriate method to prepare budget 16 3b.1 Methods to prepare budgets .16 “Flexible budget is for variable cost for different levels of cost driver utilization which is expected in the future” (Sithambaranathan Prithiviraj, 2008.) Thus, flexible budgeting process can identifies overhead cost drivers of overhead cost and budgeting for the cost which relates to the cost driver for different utilization of that cost driver .18 3b.2 Select and analysis about the appropriate method .20 3c Prepare budgets according to the chosen budgeting method 21 3d Prepare a cash budget 24 4a Calculate variances identify possible causes and recommend corrective actions .25 4a.1 Definition of variance 25 4a.2 Possible causes and recommend corrective actions 30 4b Prepare operating statements reconciling budgeted and actual results .31 4c - Report findings to management in accordance with identified responsibility centers .31 4c.1 Responsibility centers 31 4c.2 REPORT 33 Conclusion 34 Reference 35 Tutor2u (2010) Incremental Budgeting (Online) Available from: [accessed 2010] 36 business knowledge source (2010) A comparison of top-down to bottom up budgeting (Online) Available from: [accessed 2010] 36 Introduction This report will go on to deal with budgetary planning and control, preparing forecasts and budgets and then comparing them to the actual results Through this report, it can easily to see the differences between costing and budgetary systems and will discuss the resulting of variances As the management accountants of a group of companies the researchers explore the possibilities of introducing appropriate budgeting and costing methods in the operating companies In the first part of this report, the purpose and nature of budgeting process will be shown normally The second part of this report is going to mention about several budgeting methods The main purpose is to prepare a master budget it also includes: sales budget, production budget, direct materials budget, direct labor budget, manufacturing overhead budget, selling and administrative budget And also the preparation of a master budget such as actual sales during the last quarter and the budgeted cost of goods sold, dividend that will be paid The last part of this assignment is to prepare an operating system for control period 13, reconciling budget and actual profit and also calculate variances, identify possible causes The entire ratios which will be used in this part will base on the information of Francis LTD Main body 3a – The purposes and natures of the budgeting process The decisions of managers affect the profitability of the business; therefore in order to make effective decisions, the company needs to have a plan for its operations And planning the financial operations of business is called “budgeting” 3a.1 Budget and the importance of budget In fact, the budget process is paramount in the practical world of government or any organization According to BPP Professional Education (2004), “budget is a quantitative statement for a defined period of time”, which involves itemized estimates of anticipated income and expenses, including a plan of operation based on such estimates each area of a business’s operations typically has a separate budget In case study of Francis Ltd, the company has cost centre utilization budgets, conversion cost budgets, material cost budget and so on In accounting, a budget is definitely important because it reveal values Budgets link the financial resources of a business with its purposes Budgets force explicit choices among goals, all of which cost money to implement and therefore compete The managers of a company will be lack a clear idea to reach the goal of business if their company does not have a budget or a plan will make decisions that not contribute to the profitability of the business A budget serves seven main purposes – ensure objectives, planning, communication, coordination, providing framework, control and evaluation, motivation 3a.2 The purposes and benefits of a budget In any implementation, a company has to consider about purposes, anticipate costs and benefits of activities to reduce the risks and achieve the goals Budgeting process relates to every business activities of the company, therefore the reason for budget creation ought to be carefully considered before doing anything else The first purpose and benefit of a budget is to ensure the achievement of the company’s objectives The organization’s objectives are quantified and drawn up as targets to be achieved within the timescale of the budget plan Therefore the managers will focus effort to reach company’s goals For example, the budget shows the sum of money, revenues and expenditures of Francis Ltd in the period of time, as the company’s business performance so it will remind the managers about the achievement they need to reach The 2nd purpose is to compel planning, a budget helps planning forces management to look ahead, to set out detailed plans for achieving the targets for each department When a budget is created, the managers can decide the most effective ways to perform each task This also decreases daily operating disruptions while doing business The next one is communicating ideas and plans It is very important to ensure that each person affected by the plans is aware of what he or she is supposed to be doing The communication between superiors and subordinates helps affirm their mutual commitment to company’s goals For instance, in Francis Ltd, the production department and the marketing department have to agree on how to coordinate their efforts about the need for services and the resources required Coordinate activities - The activities of different departments need to be co-ordinate For example, when Francis Ltd sells products, the number and types of products to be marketed must be coordinated with the purchasing and manufacturing departments in the company to ensure goods are available Based on that’s the company will know the number of unit that must be produced during a period in order to meet both sales and inventory needs Cost Centre Utilization Budget Ref to working Cost centre 14 Cost centre 15 F03 F04 hours 15,084 9,000 Hours 8,036 21,000 Cost centers, or revenue centers, keep multiple budgets organized Cost centers are created by management as a detailed segment of a master budget The cost center may be number, letters or a combination of numbers and letters Each code appears at the top of a budget as a quick reference for bookkeepers or filing (http://www.ehow.com/info_7834878_cost-center- budget.html) This cost center budget helps to track expenses and income A department or project's goals should stem from the overall budget goals outlined in the cost center Each time an expense is incurred for a project or department, the money is recorded as an expense of the cost center At the end of the year, the group can assess how close the project came to being within its projected budget Large discrepancies between cost center budgets and actual expenses may mean revisiting operational strategies for a particular group within the business Conversion Budget Cost centre 14 Cost centre 15 Total Ref to working Variable cost Fixed cost Total £ 150,280 147,000 £ 104,040 123,000 £ 254,320 270,000 524,320 This conversion budget help the company to fix their budget that’s may have bad affect for their business activities Based on the company can find the best strategy for their development According the table above, the variable cost for cost centre 14 and 15 are 150,280 and 147,000 respectively While the fixed cost for cost 14 and 15 are 104,040 and 123,000 After that’s, we can calculated the total cost that are 254, 320 and 270,000 Material Budget Ref to working F03 F04 Total £ 439,950 401,800 841,750 Direct materials budget is prepared after computing production requirements by preparing a production budget Direct materials budget or materials budgeting details the raw materials that must be purchased to fulfill the production requirements and to provide for adequate inventories (http://www.accountingformanagement.com/material_budget.htm) The table above, we can see that the ref to working of F03 and F04 is 439,950 and 401,800 respectively The company can based on that’s they can prepare the budget to serve their objectives in the present and in the future Product Cost Budget Ref to working Product cost Based on 100 units into cost centre 14 Material cost centre 14 Conversion Cost at the end of cost centre 14 Yield of good units Cost per good units Cost centre 15 Conversion cost Cost centre b/f Cost at the end of cost centre 15 Yield of good units Cost per unit F03 £ F04 £ 3,500 1,320 4,820 80 (units) 60.25 2,000 440 2,440 70 (units) 34.86 721.8 4,820 5,468 76 (units) 71.95 1,129.5 2,440 3,385 63 (units) 53.73 Financial plan prepared for every major expense category, such as administrative cost, financing cost, production cost (http://www.businessdictionary.com/definition/cost-budget.html) The product cost budget help the company to calculate the cost to manufacturing their product and predicts the strategy and the budget product in the future Profit & Loss Account Ref to working F03 F04 £ £ Profit & loss account Sales production 705,000 817,400 Cost of sales (676,330) (655,506) Production profit (unadjusted) 28,670 161,894 Opening stocks adjustment WIP 3,599 2,311 FS 13,450 22,038 Production profit 45,719 186,243 The Profit and loss account help the company control their financial resource through calculate sale production, cost of sales, production profit and opening stocks adjustment 3d Prepare a cash budget Cash Budget January Cash receipts: Sales Sale in month Account receivable Commission Total cash in Cash payments: Purchase Telephone Rent Transport Miscellaneous expense Insurance Total cash out Net receipts Opening balance Closing balance February March Total 160 780 50 990 190 640 50 880 200 760 50 1,010 550 2,180 150 2,880 370 84 75 100 50 240 480 75 100 50 679 311 1,200 1,511 465 415 1,511 1,926 75 100 50 500 1,205 (195) 1,926 1,731 1,090 84 225 300 150 500 2,349 531 1,200 1,731 The cash budget is an estimation of the cash inflows and outflows for a business or individual for a specific period of time Cash budgets are often used to assess whether the entity has sufficient cash to fulfill regular operations and/or whether too much cash is being left in unproductive capacities (http://www.investopedia.com/terms/c/cashbudget.asp#axzz1la31ozWY) A cash budget is extremely important, especially for small businesses, because it allows a company to determine how much credit it can extend to customers before it begins to have liquidity problems For individuals, creating a cash budget is a good method for determining where their cash is regularly being spent This awareness can be beneficial because knowing the value of certain expenditures can yield opportunities for additional savings by cutting unnecessary costs 4a Calculate variances identify possible causes and recommend corrective actions 4a.1 Definition of variance A variance is the ‘Difference between a planned, budgeted, or standard cost and the actual cost incurred The same comparisons may be made for revenues.’ The variance measure of the average distance between each of a set of data points and their mean value; equal to the sum of the squares of the deviation from the mean value In accounting, the difference between the actual cost and the standard cost for direct material, labor and overhead There are three part in the total profit variance: sales variances, production variances and non-production cost variance Figure : Variance relationship Output Direct materials Direct labor 800 units Type A Type B Skilled Unskilled Original 64,000 (12,000) (16,000) (4,000) (10,000) Flexible 950 units 285 kg 950m 475 hrs 1,484.37 Actual 76,000 units 310 kg 920m 445 hrs 1,375 (14,250) (19,000) (4,750) (11,875) hrs Overhead (12,000) 950 73,000 (15,200) (18,900) (4,628) (11,275) hrs (12,000) (11,960) (All fixed) Operating (54,000) 10,000 (61,875) 14,125 (61,963) 11,037 Profit Working:  Sales: x 950 = 76,000  Direct material type A: £14,250 x £950 =  Direct material type B: x £950 = £19,000  Direct labor skilled: £4,750  Direct labor unskilled: £11,875 x £950 = x £950 = Solution:  Sales variance Volume (£14,125 – £10,000) Price (£76,000 - £73,000) £4,125F £3,000A  Material variance Type A AP x AQ £15,200 AQ x SP 310 kg x £50= £15,500 Price £300F SP x SQ £14,250 Quantity £1,250A £950A Type B AQ x SP 920m x £20= £18,400 AP x AQ £18,900 Price £500A SP x SQ £19,000 Quantity £600F £100F  Labor variance Skilled AR x AH £4,628 AH x SR 445 hrs x £10= £4,450 Rate £178A SR x SH £4,750 Efficiency £300F £122F 28 Unskilled AR x AH £11,275 AH x SR 1,375hrs x £8 = £11,000 Rate £275A SR x SH £11,875 Efficiency £875F £600F 29 4a.2 Possible causes and recommend corrective actions Following are the causes of material price variance: • • There could have been recent changes in purchase price of materials The materials variance can be due to substituting raw materials different from the • original material specification Price variance can be attributed to the non availability of cash discounts which was • originally anticipated at the time of setting the price standards Changes in transportation costs and storekeeping costs can also be contributing factors to material price variance Causes to labor variances The standard labor rate established by a company is an average, usually pertaining to average quality workers Newly hired workers will likely get paid less which creates a favorable labor rate variance They will also work more slowly than more experienced workers creating an unfavorable labor efficiency variance The opposite is true if a company employs highly skilled workers Causes to manufacturing overhead variances The controllable overhead variance exists because more or less overhead costs were incurred than the amount allowed The volume variance exists because the volume level at which the company operated is different the amount budgeted a Recommend corrective action The control action which may be taken will depend on the reason why the variance occurred Some reasons for variances are outlined in the paragraph below • Out of date standards will provide information about the inaccuracy of the standard • Random or chance fluctuations are the variance falls within this range, it will be classified as a random or chance fluctuation • Efficient or inefficient operations help the company to lead to control action to eliminate the inefficiency being repeated or control action to compound the benefits of efficiency 30 4b Prepare operating statements reconciling budgeted and actual results Bradley-Allen Ltd Operating Statement For the year ended 2012 $ Budgeted profit Sales: Volume Price $ 10,000 4,125 F 3,000 A 1,125 F Direct Materials A variances: Usage Price 1,250 A 300 F 950 A Direct Materials B variances Usage Price 600 F 500 A 100 F Skilled direct labor variances: Efficiency Rate 300 F 178 A 122 F Unskilled direct labor variances: Efficiency Rate 875 F 275 A 600 F 40 F 11,037 Fixed overhead variances spending Actual Profit An operating statement, also known as an income statement or a profit and loss statement, is a financial statement showing a company's net income or net loss for a specified period of time (http://www.ehow.com/facts_6832282_operating-statement-definition.html) Based on that’s, the company can based on the operating statement to manage the business activities However, the company should care about the expenses, including depreciation expense, rent expense and utilities expense, are listed individually on the operating statement The expense total is listed and then subtracted from the gross profit margin 4c - Report findings to management in accordance with identified responsibility centers 4c.1 Responsibility centers 31 An operating statement is a regular report for management of actual costs and revenues, as appropriate, usually compares actual with budget and shows variances(BPP, 2004, Unit 9: Management Accounting, pg.211) Responsibility accounting is a system of accounting that makes revenues and costs the responsibility of particular managers so that the performance of each part of the organization can be monitored and assessed A responsibility center is a section of an organization that headed by a manager who has direct responsibility for its performance (BPP, 2004, Unit 9: Management Accounting, pg.211) Each particular responsibility center of the Triple F Group is prepared by a specific budget and its managers have to be responsible to achieve budget targets Moreover, they must also take appropriate actions if the variance is significant and able to achieve the targets or not Responsibility centers include cost centers, revenue centers, profit centers and investment centers Cost centre is any part of an organization which incurs costs Cost can be quite small, sometime one person or one machine or one expenditure item An organization might establish a hierarchy of cost centre For instance, within a transport department, individual vehicle might be made a cost centre, the repairs and maintenance section might be a cost centre, there might be cost centre for expenditure items such as rent or building depreciation on the vehicle depots, vehicle insurance and road tax The transport department as whole might be a cost centre at the top of this hierarchy of sub-cost centre Revenue centre is a section of an organization which raises revenue but has no responsibility for production The term ‘revenue centre’ is often used in non-profit-making organization In fact, revenue centres are similar to cost centres, except that whereas cost centre are for cost only, revenue centre are for recording revenue only Information collection and reporting could be base on a comparison of budgeted and actual earned by that centre Profit centre is any section of an organization which earns revenue and incurs costs The profitability of the section can therefore be measured Profit centres differ from cost centres in that they account for both costs and revenues The key performance measure of a profit centre is profit The manager of the profit centre must be able to influence both revenues and costs A profit centre manager is likely to be fairly senior person within an organization 32 Furthermore, a profit centre is likely to cover quite a large area of operations A profit centre might be an entire division within the organization, or there might be separate profit centre for each product, brand or service or each geographical An Investment centres manager has some say in investment policy in his area of operations as well as being responsible for costs and revenues There are some profit centres which might share the same capital items such as the same buildings, stores or transport fleet, and so investment cetres are likely to include several profit centres and provide a basis for control at very senior management level which is similar to a subsidiary company within a group The performance of an invest centre is measured by the return on capital employed It shows how well the investment centre manager has used the resources under his control to generate profit 4c.2 REPORT To: Management of Cost Center, Bradley-Allen Ltd From: Triple F Group Date: January 20, 2012 This report contains an operating statement showing a reconciliation of budgeted and actual cost for year The purpose of this report is to explain and recommend to the manager This cost occurs is involved to cost center All of this cost occurs is involved to cost center In details, • The material price variance is the difference between the standard cost and the actual cost of the actual quantity of material used or purchased Bradley-Allen Ltd has material price variance is $200 which is an adverse price variance Thus, BradleyAllen Ltd need maintain it It also requires responsibilities for purchasing and controlling stock managers As a result of purchasing high qualities material, it makes expenses increase In addition, there are some errors which may cause in allocating material to jobs Hence, the manager should calculate and compare benefit of using higher quality material with the cost expense for it, need a standard for controlling error in allocating material There is a big difference between the standard quantity of materials which should have been used for the number of units actually produced, and the actual quantity of materials used With Bradley-Allen Ltd, material usage variance is adverse variance with $650 The reason for it is material used of lower quality than standard However, those situations are outside the buying management’s control 33 Thus, it is important for the Purchasing manager to choose the appropriate time to make the decision The responsibilities is purchasing and controlling stock managers Moreover, they should forecast and order enough for making products without purchasing too much • There is a big difference between the standard cost and the actual cost for the actual number of hours paid in the labor rate variance It has adverse variance of $475 The reason for it is wags rate increase Thus, they should evaluate work and divide human resource and machine resources effective to saving time to work, it also make expense for wage reduce They should inform to accounting department to make adjustment when the work is overload The labor efficiency variance is the difference between the hours that should have been worked for the number of units actually produced and the actual number of hours worked, valued at the standard rate per hour It is a favorable variance with $1175 Hence, this is very important to purchase material effectively and control time or work and divide human resource effectively Moreover, apply standard system for errors in allocating times to jobs Prepared by: Triple F Group Conclusion As a role of a management accountant of a group of companies and the managing director has asked to explore the possibilities of introducing appropriate budgeting methods is one of the operating companies This report has deal with budgetary planning and control, preparing forecasts and budgets and then comparing them to the actual results Through this report, it can easily to see the differences between costing and budgetary systems and will discuss the resulting of variances Through the report, several problems have been handled 34 Firstly, the purpose and nature of budgeting process has been shown Secondly, several budgeting methods have been shown along with appropriate methods have been chosen for the case study The master budgets for both company has been prepared On the budget preparation it also includes: sales budget, production budget, direct materials budget, direct labor budget, manufacturing overhead budget, selling and administrative budget Several data have been calculated such as: actual sales during the last quarter and the budgeted cost of goods sold, dividend that will be paid…The last one is the preparation of an operating system for control period 13, reconciling budget and actual profit And also the calculation of variances, identification of possible causes The recommendation of corrective action also is given The entire ratios used in this part are base on the information of chosen company Moreover, a report to findings to management in accordance with identified responsibility center also is prepared Reference • • • • • • Qfinance (2010) Definition of budget committee (Online) Available from: [accessed by 2010] accounting-financial-tax (2010) How To Prepare a Flexible Budget (Online) Available from: [accessed 2010] Mr Cornell (2010) Budget process (Online) Available [accessed by 2010] The budget process Drawing up budgets Functions of the budget committee (BPP professional education, 2004) 35 from: • Tutor2u (2010) Incremental Budgeting (Online) Available from: [accessed 2010] • business knowledge source (2010) A comparison of top-down to bottom up budgeting (Online) Available from: [accessed 2010] • tutorials point (2010) Cost Variance (Online) Available [accessed 2010] • Bright hub (2010) Examples of Cost Variance (CV) and Schedule Variance (SV) in a Project (Online) Available from: http://www.brighthub.com/office/projectmanagement/articles/57942.aspx#ixzz1AkJ8fMWA [accessed 2010] 36 from: