Management accounting costing and budgeting

Published: Last Edited:

This essay has been submitted by a student. This is not an example of the work written by our professional essay writers.

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:

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:

£Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â  £


Sales: 90,000 X 12

Less cost of production

Opening Inventory                                          0

Add productions (100,000 X 5)                     500,000


Less closing Inventory (10,000X5)    - 50000


Contribution                                                                                        630,000

Less Total FC: Production                                                      (270,000)

Admin Costing                                                                                     (20,000)

Net Profit                                                                                            340,000

Year1Absorption costing method:

£Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â  £


Sales    (90,000X12)

Less cost of production

Opening Inventory                                          0

Add production (100,000X5)             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:

£Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â  £

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:

£Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â  £

Sales (110,000X 12)                                                               132,000

Less cost of production

Opening Inventory (10,000X5)                      50,000

Add production          (110,000X5)                550,000


Less Closing Inventory (10000X5)    (50,000)


Contribution                                                                                        770,000

Less total FC: Production                                                                   (270,000)

Admin                                                                        (20,000)

Net Profit                                                                                              480,000

Year 2    Absorption costing statement:

£Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â  £

Sales                                                                                                    132,000

Less cost of production

Opening inventory (10000X8)                        80,000

Add production (110,000X5)             800,000


Less closing Inventory (10,000X8)      80,000



Over absorption (20,000X3)                                                       60,000

Less admin cost                                                                                  (20,000)

Net profit                                                                                            480,000

Year 3    Marginal costing statement:

£Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â  £

Sales (750,000X12)                                                                1140,000

Less cost of production

Opening inventory (10,000X5)                       50,000

Production      (90,000X5)                              450,000


Less closing inventory (5000X5)          25,000


Contribution                                                                                        665,000

Less total fixed cost: Production                                            (270,000)

Less total fixed cost: Admin                                                    120,000

Net Profit                                                                                            375,000

Year 3    Absorption costing statement:


Sales                                                                                                    140,000

Less cost of production

Opening Inventory (10,000X8)                      80000

Add production       (90,000X8)                     720,000


Less closing inventory (5000X5)          40,000


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                                    2

Direct labour                          1

Prime Cost                                          3

VC/Unit                                              2

Marginal cost                          5

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

F.O.A.A (unit)                                   3

Absorption cost                                   8

Full cost/Total cost                              8

F O A R -       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.

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

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                                                                                Assets=1600/1600+20

=1.5 times                                                                                   =.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 doesn't 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 customer's opinion that counts. In these cases the customer's 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 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 department's 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:

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 person's 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 period's 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.


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.


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:


Wind-up train

Sales unit



+ Closing Inventory





- Opening inventory






Material Usage Budget:


Wind-up train

Production (units)



Usage per unit





Total Material usage



Material purchase Budget:


Wind-up train

Material usage



+ Closing Inventory





- Opening Inventory





Cost per unit





Labour Budget:


Wind-up train




Direct labour 18/60





Direct labour/hr







Cash Budget: (P11)


Wind-up train

Demand Qty



Selling price/Unit








Wind-up train






Total Revenue




Therefore half of sales. (40000/2)


















Balance B/F



Calculate a variance, identify possible causes and recommend corrective action: (p12)

Actual result

Flexible budgets

Actual production units

8900 units

8900 units


direct materials



Direct labour




Variable overhead




Fixed overhead








Calculatuin of Variences:

1)     Total material variances

a)     Price variance

Actual cost of material =                      £163455

Budgeted cost of material

(Actual cost Ã- standard cost)

£35464 Ã- 4.5=                                    (159588)

3867 A

b) Usage variance

Actual usage =                                      35464 kg


(Actual output Ã- standard usage)

8900 Ã- 4kg)                                         (35600)

136 F

Ã-standard cost / kg                                 4.50

612 F



3255 is the variance

2)  Labour variance

a)     Price variance

Actual cost of labour =                                                             224515

Less (actual hours worked Ã- standard cost/ hour)

44400 Ã- 5                                                                             = (227000)

2485 F

b)  Idle time variance

Idle time hrs.                                            1300

Ã- Standard rate /hour                                  £5

6500 A

c)      Efficiency variance

Actual hours worked                                    = 44100

Less standard hours

(Output Ã- standard)

8900 Ã- 5                                                      = (44500)


Ã- Standard cost per hour                                      £5


3) Total variable cost variance

a) Actual variable cost                                             87348

Less (actual hours worked Ã-standard cost /hour

44100 Ã-2)                                                                (88200)

852 F

b)  Efficiency variances

Actual hours worked                                   = 44100

Less standard hours                                     (44500)


Ã-standard cost per hour                                        £2

800 F

4) Fixed overhead variance

a) Expenditure variance

Actual overhead                                                          =134074

Less budgeted overhead Ã- FOAR per unit

(8700 Ã- 5) = 43500 Ã- 3 =                                             (130500)

3574 A

b) Volume variance

Budgeted output                                             = 8700

Less actual output                                              8900


Ã- FOAR/ unit                                                           15


Volume variance

1)     Capacity variances                            2)   efficiency variance

Budgeted hours   43,500                            actual hours            44100

(-) actual hours    44,100                           (-) standard hours    44500

600F                                                               400 F

Ã- FOAR per hour        3                               Ã- FOAR                         3

1800F                                                                1200F

Sales variances

Sales price variances


Actual sales                                          613,200

Budgeted sales (8400 Ã- £75)              630,000

16,800 A

Sales volume variance

Actual units sold                                     8400

Less budgeted units                              8000

400 F

Ã- budgeted profit per unit                            7


Reconciliation Statementm (P13)

Budget profit 8000units x £7/unit                 56000

Sales variance

Price variance 16800 A

Volume variance           2800 F



Cost Variance                         F                                              A

DM Price variance                                                                              3897

DM Usage variance                612

DL Price variance                               2485

DL Idle variance                                                                                 6500

DL Efficiency variance                       2000

V/C Price variance                              800

V/C Efficiency variance                     852

F/O Expenditure variance                                                       3574

F/O Capacity variance                        1200

F/O Efficiency variance                      1800                                        13941       (4192)

Actual profit                                                                                                       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 Reynar's 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.


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.