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Royal engineering company is a typical manufacturing .over last few years company has increase in their product and factory automation and reduction in there direct labour hours each years. Also company wants to make their reputation as a global leader in modern manufacturing methods. For that the senior managers recognize that they need to change their existing management and accounting system.
The Charlton division has a standard costing system that was first introduce in the 1960s. According to that managing director ask to their managers to their comments on this existing system and identify what change the need in future. Other group of manager said they need to for standard costing system. So that's why they need to judging managerial performance.
cost and identifies their important in their pricing strategy:
Pricing strategy is a refers to how a company uses pricing to achieve its strategic goals, like offering lower prices to increase sales volume or higher prices to decrease excess. Also pricing strategy being establish then also managers should know there pricing goals, how company want their benefits like short terms goals, long terms goals , and they make their profits. Pricing strategy entail more than reacting to market conditions, such as reducing pricing because competitors have reduced their prices.
Below section explain various ways companies develop pricing policy and strategy. First, cost-based pricing is measured. Second is value-based pricing. Third, demand-based pricing is addressed is competition-based pricing.
According to prising strategy cost base pricing system is an associate with their cost like fixed and variable cost of their product or service. Below are the definition of costs.
Fixed Cost; Fixed cost remained constant irrespective of level of sales. Best example of fixed cost id rent, employee salary
Direct cost: A direct cost is that which easily traced to the cost object under consideration.
Indirect cost: An Indirect cost is cost that cannot be easily and conveniently traced to particular cost object under consideration.
After cost definition supervisor can add their profit of the product or service like 5 or 10 percent. The aim of the cost is to cover all cost and include in and achieve their target level of profits. So this method is simply straightforward for study only accounts and financial records to determine their price. Also it is popular because of it is easy to get internal information. Company can protect its prices based on costs, and show that its prices cover costs a profit. Below image show how prising strategy work in an organization.
(Figure 1. Adapted from, www.learnmarketing.net.)
Classification of cost is depend on nature, function, identification, behaviour, product, time, and many more. Material cost, labour cost, and expenses cost, direct and indirect cost which involve in cost. Cost is always less then profits, when the product is ready then we identify cost. Cost is always more than expenses.
Below calculation is for cost.
Direct material need for 2000 unit output is 6000 kg.
2000 * 3 = 6000.
Direct Labour hours need for 2000 unit output is 18000 hrs.
2000*9 = 18000.
1 - Material variances for prise is (Standard prise - Actual Prise)*Actual Consumption.
(14 -15)6000 = 6000(A).
2 - Used Material Variance = (Actual Quantity - Standard Quality) prise
(87000-6000/15)14 = 2800 (F)
3 - Total Material cost Variance = Standard Cost - Actual Cost
6000*14 - 87000 = 3000 (A)
1 - Labour Variance Rate = (Standard Rate - Actual Rate)Actual labour Consumption
(17 - 17.50) 18000 = 9000(A)
2 - Total Direct Labour Variance = Total Direct Cost - Actual Rate) Total Labour Cost
350000 - 17.50 * 18000 = 35000(F)
As the management account has done some research and they found some information which is not available in original standard was agreed. So the material purchased at 14.80 per kg.
1 - Material variance Prise = (Standard prise - Actual Prise )Actual consumption.
(14 -14.80)6000 = 4800 (A).
2 - Usage Material Variance = (Standard Qty. - Actual Qty.)Standard prise
(6000 - 87000/15)14 = 2800 (F).
3 - Material cost variance = standard cost - actual cost
6000*14.50 - 87000 = 1000 (F).
Data of labour cost is locally the market rate for labour is 10% less than the standard rate per hours from £17 by Charlton.
1 - Labour Rate Variance = (Standard rate - actual rate) Labour cost
17 - 15.30 * 18000 = 30600 (F).
2 - Total direct labour variance = (Direct Labour cost - Actual rate) actual labour consumption.
350000 - 15.30 * 18000 = 74600(F).
The management accountant also obtained some data on relative productivity of direct labour, for each unit direct labour hours required 8.5 hours. If labour hours are required 8.5 hrs. For 2000 unit so total hours is 17000. (8.5 *2000= 17000).
1 - Labour rate variance = (Standard rate - actual rate) Actual labour consp.
(17 - 17.50)17000 = 85000 (A).
- Total direct labour variance = total labour cost - actual rate * actual labour consp.
350000 - 17.50 * 17000 = 52500(F).
Recommendation: Royal engineering is a typical manufacturing company. From last decade there has been increase in product diversification and factory automation and reduction in the labour hours worked each year. Competition increase and company want their reputation as a global leader in manufacture methods. So the company should have to adopt a standard costing system.
Task -2: Management Accounting and Decision Management:
Black's Plc. is a manufacture company. Dou to a short of staff in accounting department, the trainee staff prepared budgets for month of November 2008. The management of the application division not believe the variance calculated is fair assessment of the division's performance. She thinks that budgets figures are inappropriate and a flexed budget should be used to calculate the variances. So she provides so information to preparing budgets.
Budget definition: "A budget is a financial document use to project future income and expenses. The budgeting process may be carried out by individual or by companies to estimate the company can continue to operate with its projected income and expenses." (www.biztaxlaw.about.com/od/glossaryb/g/Budget.htm)
As per black's Plc is introduce a flexible budget which assist to company's budget and variance. Before we calculate flexed budget I explain what is budget and what flexed budget is below.
A budget is plan for future. Budgets are planning tools, and usually budget is prepared to the start of the period being, budgets are both planning tools and performance evaluation tools. The flexible budget is a tool of a performance evaluation. Flexible budget prepare before the end of the period. Flexible budget is a compare actual appli to applies. The flexible budget variance is the difference between any item in flexible budget and the corresponding item from the statement of actual result.
The following steps are used to prepare a flexible budget:
1 - Decide the cost per unit of output; also decide the budget sales price per unit of output.
2 - Decide the budgeted level of fix cost.
3 - Decide the actual volume of output.
4 - Make a flexible budget based on the step 1 and step 2, and step 3 of the actual volume of output.
Flexible budget are prepare at the end of the period, when actual output is known. Above steps used earlier to the start of budgets.
According to above note Balak's Plc. Can make their budget as below. This budget report for November 2008 for appliance division when actual favourable variance of 48. It was deemed appropriate to check it against a flexed budget.
Budgetary Targets & Action Plan:
After preparing the budget it is clear that flexible budget should be appropriate for the organisation because unfavourable difference of 20,000 in comparison to actual budget.
Suitable Target Budget for Appliance Division:
Flexible budget will suitable. Flexible budget identifies above your head cost drive. Also flexible budget is help in cost which are relates to the cost driver. Also budget can be prepare for similar activity and control cost by comparing actual cost with the budget amount for different level of activity and take corrective action to control these all cost close to the flexible budget prepared and use it. The system of budgeting is very useful to control cost of any institute and also budget show business an important role. Budget is very important in company and their economical use of resources.
Corrective Action Plan:
If any kind of business without assessment of any action plans no one can analysis its operation and meaning. For assessment of manager and CEO will find that what is going wrong and what information they need and what they expect from plan and is given information that proper information , data which useful for creation result making for the administration, below are some information of budget planning are.
Evaluate the presentation of the company with budget result.
Flexible budget process put in to operation so the proper variances must be calculated.
New action plan complete all they want of managers and CEO of Balak's PLC, the costing are available for control variance also they provide base for appraisal of work and stock in progress. Also different type of budgeting, accounting and costing will help company to take action like what is good and more useful. The range of management information systems helps the manager and CEO for strategic planning and speedier declarations.
Balak's Plc. Have to take some action plan on their budget, for success of preparation of programme fix the management responsibly for working of policy in the organisation, adopt proper software and staff which provide all desired in order to CEO and administration, provide all type of training and motivation to all class of workers and evaluate the system if they need any change immediate put in to action. Provide latest training to workers etc.
3-TASK3.Customer Profitability at AAK Plc.
Since 2009 AAK Plc. Managers using various data collecting activity, and each team use various type of accountant systems. Each team typically work in 3-6 month on data collection and developing their spreadsheets. To this data collecting each team have mainly focused on product costing, also some teams have set up to collect data to improve the company's understanding of customers- relate cost and business. One team has looked at distribution costs and the one has order related costs. The company has 250 customers in which 3 were included in analysis. In that they represent only 10% of total sales. Finally the team is considered labour and direct costs.
Value analysis and value engineering principle and recommendations within an organisation.
As per objective each team was to estimate the total amount overhead cost and annual volume for each cost driver. Also company only focused on three customers the data was quickly estimated and second objective to estimate the perch age of every cost driver per customers.
As per value analysis and value engineering accepting basic components and their related costs and also tries to get better value of product. It will look to find development of the product by reducing cost or increase the volume. Systematic work plan is the base of value analysis its plan can be separated into various steps which are mention bellowed.
1. - information
2. - preparation/orientation
3. - costing
As per value analysis application only needs to make use of fundamental system such as chart, diagrams, matrixes, pare to chart, etc. In most of the value analysis systems. Here the main objective of this data collection of AAK Plc. Is to estimate the total overhead cost and yearly value of each cost driver, and second objective is calculate approximately percentage of each cost driver per customers.
The all analyses are base on 3 customers represent 10% of total sales, where company having 250 customers. So having only 3 customers having 10% of total sales share is not sufficient. So it is advisable that at least 30 to 60 customers will represent minimum of 30% to 50% of total sales, also data will be collected from customers who belongs to various areas which help to identify the area wise demand, and annual overhead etc.
Data is based on only 4 to 8 activates while 20 to 30 activities are recognized, so it is advisable that research based on minimum 10 to 15 activities and out of them 5 to 6 key activities and rest of others are secondary activities.
The best way of identify key activities of cost and cost sampling, but proper responsibly should be taken at the time of data collection, lost of market picture effect the cost place to place, so first time think about the entire cost for evolution.
Evaluation of team 1 data. (Order related overheads).
1-Activity cost pool: order modify
2-Cost driver: correction number of orders
3-Evaluation comments: 3000 quantity ration is too high, the organisation have not consider modification request after the specific time of basic order or the blame of other cost of conversion.
1-Activity Cost Pool: Pre and Post sales support
2-Cost driver: pre sales and post sale support evaluation
3-Clarification: last long time above your head cost of pre sale and post sale prop up is same, post sale cost is very high compare it pre sale cost. It is fact that sales after provision is necessary but lost of complain are received from the customers.
1-Activity cost pool: deferent payment
2-Cost driver: over more than 2 month payment
3-Evaluation remarks: for every late payment more than 2 months shall be charged interest or penalty of late payment, also for early payments organization may offer cash discount.
Evaluation of team 2 data. (Distribution costs).
Storage cost may be reducing by evaluate new packing and techniques. If we measured area wise presentation of each driver per each customer we found that presentation of south region is really very good, with low order modification cost. While custom of east region have need of lots of awareness of progress of order revision cost, also pre and post sale maintain hours.
Activity - based costing in an organisation.
The information also helps to make a strategic planning to cut the extra cost and also know the capacity of every cost and cost drivers of each customer. Here is some majored reward of using value analysis. Value analysis is used to increase the value of product or services to all uneasy by in view of the function of individual items. This task then become to the increase the value or cut the cost. Below is value analysis describes.
Identify and prioritize function:
Identify the item to be analysed and for whom it is produce. List the things for which the customers is paying .also identify the secondary function by asking how is this achieved?.or what are other function are useful the basic function.varify the relative important of each function.
Analyse contributing function:
Find the Â machinery to the item being analyse that are used to provide the main function. Also measure the cost of each machinery as correctly as possible, with all production cost and material.
Reduce the cost of machinery that add little value, particularly high cost machinery.
Also the value which added by machinery that contribute the function which are important to customers.
Also inconvenience of deferent mature may come up with the submission of value examination. The below rules have to be reserved in mind in order to arrive at successful getting of the route is avoid making any general statement, be specific at every moment. Examine all costs involved. And make lots of use of information.
In the whole worlds value analysis is an important tool of every rising material and labour cost. It is in point of fact a practice as part of sample engineering, but is very important to use the complete unequal the development and commercial process. Also it is important that value analysis to producer is that it provides a planned method to recognize and put into practice ways of reducing cost in the development cycle as possible. Also used as a valuable tools for reducing cost in production.
Value analysis is important process of beginning a team relationship between ranges of various departments which are involve in the development, material purchasing and production of goods. It is also very good ways to getting customers introducing new manufactured goods into production.
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