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Sample on Management Accounting


This report is prepared on management accounting concepts. In this report costs are discussed and classified in to various categories like function, nature and behavior. In the report budget is also prepared and their results are also interpreted. By doing this an attempt is made to identify possible reason for positive and negative variance in the budget. In the middle part of the report cash budget is also prepared and under this cash inflow and outflow items are taken in the budget. Trends in the cash inflows and outflows are analyzed and comments are made in respect to these trends. At the ends of the report variance analysis is done in terms of sales, material and labors. Along with this, responsibility centers are also discussed in detail at the end of the report.

1.1 Classification of costs on the basis of element, function, nature and behavior

Cost refers to the money that is incurred in producing goods and services. In business different sort of costs are incurred. These costs are different from each other and due this reason these costs are divided in to several parts.

Elements of cost- Cost have three elements like material, labor and overhead cost. Material cost refers to the cost that is related to material purchase. Whereas, labor cost is related to the employees that are involved in the production process. On other hand, overhead refers to the other indirect production cost like logistic expenses. By adding all these costs unit cost of the product is calculated by the cost accountant. 

Function- In an organization expenses are incurred by the all departments whether they are finance, marketing or HR department (Münch,, 2014). On the basis of these departments costs are classified in to various departments. The main examples of function cost are interest expenses, sales and employee hiring expenses.

Nature- On the basis of nature costs are classified in to two categories namely direct and indirect cost. Direct cost refers to the cost that are related to the production process eg  raw material purchase Whereas, indirect cost is related to the expenses that are not directly related to the production eg, transportation expanse. By using all these cost entire cost of product is computed.

Behavior- On the basis of behavior costs are divided in to three categories namely fixed,variable and semi variable cost (Busse,  Schreyögg and Smith, 2008). Fixed cost are those costs that never get changed with change in level of output. Eg land purchase. Whereas, variable cost is a cost that keeps on changing steadily when produced units vary in numbers eg labour cost. On other hand there is a semi variable cost whose some part is fixed and some is variable. With change in production variable part of cost also get changed.

1.2 Calculation of job cost and unit cost

It is a process in which entire cost of specific task is calculated by the firm. In this regard direct expenses and fixed as well as variable cost are included in computing cost of production (Druy,  2013). Below is a table in which , job cost sheet is prepared for identifying total cost and cost per unit for 200 units:

Table 1: Calculation of total cost and per unit cost for a job

Job cost sheet for Job no. 444 
Particulars Total cost
Direct material  ( 50kg*200 units* 4£ per kg) 40000
Direct Labor ( 30 hours* 9£ per hour * 200 units) 54000
Fixed production overhead (80000£/20000*(200 Units *30 hours) 24000
variable production overhead ( 6£ *6000 hours) 36000
Total cost 154000
Unit cost (154000£/200 Units) 770


Unit cost of production of product is 770 and this is calculated by using direct material and labor cost. After that fixed and variable expenses are also computed and added to the direct costs in order to compute aggregate cost of production. Firm is producing 200 units and by dividing entire cost by these units unit cost is calculated. 

1.3 Calculation of the cost by using absorption costing technique

a) Allocation and apportion of overhead into three production departments 

Primary distribution              
Insurance of building Area occupied 25000.00 5000.00 2500.00 7500.00 7500.00 2500.00
salaries of work management No. of employees 80000.00 24000.00 16000.00 24000.00 8000.00 8000.00
Production cost   1035000.00 314490.19 272264.70 245862.78 69764.70 49617.65

2.2 various performance indicators used to identify areas of potential improvements

In order to judge the effectiveness of cost control techniques some of the facts and figures are used. These are known as performance indicators. Some of the performance indicators that can be used by the firm are as follows.

Turnover- Turnover refers to the sales that a Jefferey & sons book in the specific time period. This parameter is used to measure company performance when some changes are bring in an organization that directly affects company sales (Ying, and Zhengfei, 2006). If revenue of the firm elevate then it can be said that measures that were implemented by the firm are giving fruitful results.

Profitability- Some times firm management apply cost curtail techniques in an organization in order to reduce their cost of production. If these measures are implemented in proper manner by Jefferey & sons then cost of production fall be some percentage. Hence, profit of the firm get increase because sales price of the product remain same even cost of the production is reduced by the firm.

Customer satisfaction- In order to ensure that firm is serving a product as per people needs customer satisfaction is used as a parameter by the firm (Zeff,  2007). By using data related to customer satisfaction Jefferey & sons identify the extent to which it is successfully satisfying needs of the customers.

Objectives- It is another performance indicator that is used by the firms in order measure extent to which improvements happened in the specific variable. If these objectives are achieved then it is assumed that firm is performing better or vice verse.

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2.3 Ways to reduce cost, enhance value and quality

In order to reduce cost Jefferey and sons needs to innovate their production process. In this regard firm will need to make heavy capital expenditure. But in long term company cost of production will fall sharply. Hence, it can be said that this measure of cost curtailment is dearer in nature. By innovating production process quality of the product is also improved. By doing research and development  Jefferey and sons can identify things that they need to change in the production (Sikka, 2008). By adding something new and replacing old techniques of production quality of produced units can be improved to large extent. Jefferey & sons can also use transportation technique  in order to identify best shortest route in order to reduce transportation cost.  Many times an organization cover a large area in order to reach destination place. This lead to increase in transportation cost. Hence, by using this technique transportation cost can be reduced to large extent. All these things enhance value of the product because by innovating production process cost of production is reduced for the firm and quality of product is also improved. Hence, this enhance value of the product.

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3.1 Nature and purpose of budgeting process

Nature of the budget process refers to its special features. The entire process of budget preparation is unique in nature. Below budget process is presented and its nature is also reflected in this process.

Determination of standards- At this stage standards for the budget are determined by the managers. In this regard standards are determined using various sort of information. In this regard past data is analyzed and it is identified that objectives were achieved or not. Of not achieved then what was the reasons behind non achievement of the objectives. By doing this management gets a valuable insights about determination of standards. On other hand, managers evaluate current business environment and identify current trends on same. Now after that managers compare current business environment trends with those that were earlier. At that time objectives were achieved or not is also identified (Jorion, 2007). If not then probable reasons are searched that are already identified in this stage. On basis of such comparison managers set a standards that are challenging and achievable in nature. This is major nature of budget.

Measurement of performance- In this stage performance of the firm is measured in a specific manner. This may be measured in terms of sales or profit. On individual basis number on units sold by salesman may also be a measure of performance. Hence, company to company these ways of measurement may change. This is important nature of budget.

Identification of variance- In this stage by comparing actual with budgeted performance variance e is identified by the managers. These variance is communicated at all levels of the management on individual basis (Evetts, 2011). Company level variance is communicated by the middle level managers to the top level managers. Hence, in this process all levels of the management interact with each other and this is nature of budget.

Purpose of budget

Purpose of budget is to make sure that all expenses are made in line to expectations and no extravagance is made in this regard. The other main purpose of the budget is to ensure that scarcely available resource that is money is utilized in most effective way (Eldenburg and Wolcott, 2005). By doing this firm makes best utilization of the available resources and also control its cost of production. This lead to increase in profit of the firm.

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3.2 Appropriate budgeting method for the organization and its need

Following are the budgeting methods that organization used in the business.

Incremental budgeting- In this method of budgeting current year sales and revenue figures are taken in to consideration by the firm. Means that firm collects a data about its current year sales. After that it forecast trends that  may comes in existence in the business environment in upcoming year. On the basis of these trends percentage change in sales, profit and cost is identified by the firm (Guthrie, 2005). That percentage change is calculated by using current figures and added to them in order to draft budget for the next fiscal year.

Zero based budgeting- In this way if budgeting old values are not used. Budget is prepared by identifying all activities of the business. Then resources are allocated to these activities in order to create a budget. Values of these resources are estimated and by using these value is budget is prepared. But this technique is often not used by the firm because there is a high chances of inclusion of unrealistic values in the budget.

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Top down budgeting- In this method, first of all higher cost factors are determined in the budget at first stage. Then lower cost factors are envisaged on the basis of higher level task cost (Mongiello, M., 2015). In this regard top and middle level managers consult with each other. Thus, this budget is known as top down budgeting.

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On the basis of above discussion it is concluded that firms must make an every effort to control cost. In this regard budgets and variance analysis can be used by the firm. By using these techniques on time management can identify that it is performing well or not. By formulating strategies on time it can improve its performance for upcoming months. Management must analyze business environment deeply in order to prepare budget in proper manner. If this will not be done then management will not be in position to make proper estimation about the budget components. Hence, control will be ineffective. Thus, it is  recommend that after due data collection budget must be prepared by the managers.

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  • Busse, R., Schreyögg, J. and Smith, P.C., 2008. Variability in healthcare treatment costs amongst nine EU countries-results from the HealthBASKET project. Health economics, 17. pp.S1-S8
  • Døving, E. and Gooderham, P.N., 2008. Dynamic capabilities as antecedents of the scope of related diversification: the case of small firm accountancy practices. Strategic Management Journal, 29(8), pp.841-857.
  • Druy, C.M., 2013. Management and cost accounting. Springer.
  • Eldenburg, L.G. and Wolcott, S.K., 2005. Cost management: Measuring, monitoring, and motivating performance. Hoboken, NJ: John Wiley.
  • Evetts, J., 2011. A new professionalism? Challenges and opportunities. Current sociology, 59(4), pp.406-422.
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