Management Accounting: Costing & 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.

This brief report highlights the information about the Collection of Cost Data and Reduction of Business Costs and Planning and Controlling Costs. Reports start with the interdiction part in which it discusses the importance of the cost information to the company.

Secondly it explains cost classifications, needs for such classification. In addition to that method of calculating repetitive values. In which it discusses the calculation of mean, median and mode. Further methods of cal calculation of dispersion are also included under the task one.

Thirdly emphasis will be given to the indicators of the productivity, effectiveness and efficient of the company. Then it explains the improvement in quality of the products and its indicators.

Under the task two emphases will be given to the budgeting process, preparation budgets such as sales, production, material usage, material purchase budgets and cash budgets. Finally it discusses the variance analysis performed for the given data in annexure and detail analysis of direct labor, direct material, variable overhead and fixed over head are included in latter part of the report.


Cost Accounting is part and partial of Management Accounting, Hence it's better to understand the meaning of the management accounting. The Association of Chartered Certified Accountants (ACCA) defined management Accounting as the " Application of accounting and statistical techniques to the specific purpose of producing and interpreting information designed to assist the management in its functions of promoting maximum efficiency and envisaging, formulating and coordinating future plans and subsequently in measuring their execution". Since Management accounting is concerned with information for management purpose. It is internal information for the organization itself and is very rarely made in public, unlike financial accounting information.

Although the cost accounting and management accounting are oftener used together they do not give the same meaning. Cost accounting is concerned with cost accumulation for inventory valuation for the preparation of financial statements used in external reporting. On the other hand it is concerned with determining costs for products, activities and entities to discharge managerial functions of planning, controlling and decision making. Hence Cost and management accounting system should generate information to meet the following requirement of the entity.

Allocate cost between cost of goods sold and inventories for internal and external profit reporting

Provide relevant information to help managers to make better decisions. This involves both routing and non routine reporting. Routing information is required for a assessing the profitability various segments of business, making product mix and discontinuation decisions. Non routine information is required for strategic decisions.

Provide information for planning, control and performance management. Planning involves translating goals and objectives in to specific activities that are required to achieve those goals and objectives. Control is the process of ensuring that the actual outcomes confirm with the planned outcomes. Performance is then measured and compared with targets on a periodic basis.

The term budget appears to have been derived from the French word " bougette" which means little bag or a container of documents and accounts. A budget is a formal operating plan of action expressed in monetary terms for a given future period of time. Simply, it is a detailed plan outlining, the acquisition and use of financial and other resources over a specified time period.

Task 01

Cost classification

Cost is monetary measure of the resources sacrificed to achieve a specific objective such as manufacturing or acquiring a product. In other word cost is the amount of actual or nominal expenditure incurred on or attributable to a specific product or department or process or activity.

Cost information is required to achieve different kind of objectives such as inventory valuation, decision making or control. Cost information cannot be used in similar way for all objectives. Therefore cost is used in different way. For this purpose cost is classified in different ways.

Cost classification for inventory valuation and profit measurement purpose.

Direct cost and Indirect cost

Manufacturing cost and non manufacturing cost

Product cost and period cost

Job costs and process cost

Cost classification for decision making purpose.

Fixed, variable, semi fixed, semi variable cost

Relevant and irrelevant cost

Sunk cost

Opportunity cost

Marginal cost

Cost Classification for control

Controllable cost

Uncontrollable cost

Need for Cost Classification

Cost classification for inventory valuation and profit measurement purpose

Direct cost and indirect cost

Direct cost - Are those costs can be specifically and exclusively identified with the specific cost objective in an effective manner?

Direct cost can be further divided in to three parts by considering the elements of cost.

Direct material - The cost of materials which become a part of the finished product.

Direct labour - The payments made to employees who are directly involving in the manufacturing process.

Direct Expense - The expenses excluding direct material or direct labour which can be directly attributed to a specific cost objective.

Indirect Cost- Are those cost that cannot be specifically or exclusively identified with a cost objective in an effective manner. These are commonly referred to as overhead cost. These are three types.

Indirect material cost- Cost of those material which are not become part of the finished product is termed as indirect material cost.

Indirect labour cost- Payments made to employees who are not directly involving in the manufacturing prices.

Indirect Expenses - Those cost other than direct cost indirect material coast and indirect labour cost.

Manufacturing and non manufacturing cost

The cost incurred for manufacturing a product is termed as manufacturing cost. This consists of direct material cost, direct labour cost, direct expense and manufacturing overheads cost.

Non Manufacturing cost

The cost incurred for the activities other than manufacturing of a product is called non manufacturing cost. Normally manufacturing cost is included to value the inventory.

Product cost and period cost

Product cost is these cost that are identified with goods purchased or produced for resale. In other words those costs which are attached to the product that are included in the inventory valuation for finished goods, or work in progress are termed as product cost.

Period cost is those costs which are attached to a specific period and therefore they are not included in the inventory valuation. These costs are treated as expenses for the period in which they are incurred and charged to income statement. Hence these cost rare not attached to a product.

Job cost and Process cost

Job costing system is applied where wide range of jobs or orders received and every job is not equal. Therefore cost of each job is calculated separately. Hence job cist is those cost which are attached to a specific job.

Process costing system is applicable where many units of the same products are manufactured. Cost of a unit is to be measured by dividing the Cost of production for the period by number of units produced. Hence process cost is those which are attached to a manufacturing process.

Cost classification for decisions making

Fixed, variable, semi fixed, semi variable cost

This classification is done based on the behavior of cost. According to behavior cost are classified in to four parts.

Under this classification costs are classified by considering their behavior with respect to the

Variable Cost

Variable cost is those costs that vary in direct proportion to the level of activity (Production Volume)

Fixed Costs

Those costs that remains constant over wide ranges of activity. These costs are not changing within short run with the changes in production volume. Since the total fixed costs remain unchanged that cost spread over the large number of units when the production volume is increased and then fixed cost per unit is decreased.

Semi Fixed cost

Semi fixed cost are those costs that jump in to different fixed cost levels at critical points of activity within short run.

Semi Variable cost

Those cost that consist of both variable and fixed component.

Relevant and irrelevant cost

Relevant cost is those costs that differ among alternative courses of actions. Therefore when decision is made those costs are relevant for the division. Cost can be changed by decisions.

Irrelevant costs are those cost that do not differ among alternative courses of action. That cost will not be changed by a decision and cost cannot be saved not taking a given course of action. These are common to all courses of action.

Sunk Cost

Sunk cost is those cost that have already been incurred for the acquired assets. These costs do not differ among alternative courses of action. They have been created by a division made in the past and that cannot be changed by a decision that will not be made in the future. Therefore these costs are irrelevant for the decision.

Opportunity cost

Expected benefits of the opportunity that is lost or sacrificed when choice of one course of action. This cost is relevant for the decision.

Marginal cost

In economic sense the marginal cost is the additional cost of one extra unit of output. But in accounting sense marginal cost is nothing but variable cost.

Cost classification for Control

For this purpose of controlling cost responsibility centers are established. Cost center is an organizational unit headed by a manager who is responsible for the cost of that unit. Some cost items can be managed by the managers of the cost unit and some items cannot be managed.

Hence controllable cost is those cost that are reasonably subject to regulation by manager and he can influenced on cost. Whereas uncontrollable cost are those cost that are not reasonably subject to regulation made by the manager with whose responsibility those cost are being identified. But the manager can not influence on these cost from his action.


Results of the Calculations as per the appendix 01 to this reports is as follows.


Representative Values

Representative values can be calculated by using following methods,

Arithmetic mean




The degree to which numerical data tend in to spread about an average value is called the variation or dispersion of the data. Following are the important methods of measuring dispersion.


Semi inert-quartile range

Mean deviation

Variance and standard deviation


Arithmetic Mean

Arithmetic Mean is the common type widely used measure of central tendency. Arithmetic mean of a series is the figure obtained by dividing the total value of the various items by their number. There are two types of arithmetic Mean

Simple arithmetic mean

Weighted Arithmetic mean

Mean = ∑ x1+x2+x3


∑X = the sum of variables

N= Number of observations


Median is the value of the item that goes to divide, the series in to equal parts, one half containing values greater than it and the other half contain values less than it. Therefore series has to be arranged in ascending or descending order before finding the median.


Mode is the most common item of the series. Mode is defined as the value of the variable which occurs most frequently in a distribution.


Is the difference between the smallest value and the largest value in the distribution? It's a rough measure of dispersion.

Range = Largest Vale- Smallest Value

Semi Inter- quartile Range

It can be defined as the half the distance between third quartile and first quartile.

Semi Inter quartile range = Q3 - Q1


Mean Deviation

Is the arithmetic mean of the deviation of a series computed from any measure of central tendency (Mean, Median, Mode) all the deviations are taken as positive? Hence it is a measure of dispersion based on all items in the distribution.

M.D. = ∑ f (D)


D= deviation from mean

f= respective frequency

Standard Deviation

This can be defined as the positive square root of the arithmetic mean of the squares of the deviations of the given observation from their arithmetic mean.

2 = ∑ (X -X bar) 2



As koontz and O' Donnel, productivity is the input: output ratio with in a time period with due consideration for quality. As a formula,

Productivity = Output


In its very simple form, productive people are capable of getting more output with less input. This is nothing to do with amount of resources we have, but how well we are cable of using available resources to achieve higher level of input.

Productivity can be measure through input output ratio. If the ratio gets high figures than the budgeted figure shows the improvement in productivity of the company.


According to Drucker, is "doing right thing", which denotes that resources are used to achieve the intended objectives. It s obviously connected with the output of a process.

Improvement in effectiveness of the company indicates through if the number of units produced for the year is greater than the budgeted production units for the year.


"Doing thing right". Hence efficiency is obviously connected with the use of input. If anything is done with a minimum use of resources, with no wastage and dumps, the way it is done is efficient. If the way something is done is sound then t is efficient.

Efficiency of the company indicates through reduction of direct labour cost per unit of output, direct material cost per unit of output and direct over head cost per unit of output. Direct labour cost per unit of out pout can be calculated by dividing the total labour cost for the period by the number of units produced. As such direct material cost for the period and direct over head cost for the period also divided by the number of unit produced for the same period in order to generates the direct material cost per unit of output and direct overhead cost per unit of output respectively. This can be compared with the current year and last year.


To meet the challenges of the competition, organizations are relying increasingly on higher quality. Although quality has always been important many organizations traditionally only emphasizes reasonable quality. It was and probably still is generally believed that high quality is associated with high cost.

High quality had not been emphasizing in the past because traditionally, the cost accounting system did not measure the costs associated with using poor quality material and producing poor quality products. Cost accountant was generally interest in financial measures. Cost of poor quality are generally non financial in nature difficult to measure and therefore ignored. Management who relied upon traditional cost accounting reports was generally unaware of the high cost of poor quality. This had contributed to the gradual erosion of competitive advantages of many organizations particularly against those organizations where there was a great deal of emphasis on quality including such features as total quality Control.

Vendor performance is an important since if vendor or supplier who do not adhere to high quality may deliver poor quality material, inadequate quantities and make late deliver. As such cost of products may increase and quality of products decreases.

If defects rates and scrap values are high and unscheduled machine down time are high indicts the poor manufacturing performance resulting poor quality to the company.

Finally measure of customer performance in terms of following indicators is important since well performance show the high quality of the company. If number of complaints are less, favorable feedback from the customers, product failures at customer locations are less and reduced warranty expenses shows the improve quality of the company.

Task 02


Budget is a detailed plan outlining the acquisition and use of financial and other resources over a specified time period.

Stages of Budgeting process

Communicating details of budget policy and guide lines to those people responsible for the preparation of budgets.

Determining the factor that restricts output.

Preparation of sales budget

Preparation of functional budgets

Negotiation of budgets with superiors

Coordination and review of budgets

Final acceptance of budgets

Ongoing review of budgets


Fixed Budgets

It is prepared based on one level of output. If actual output differs from budgeted level of output, variance will arise. Therefore it's prepared on the assumption output and sales can be estimated with fair degree of accuracy. In the situations where sales and output cannot be estimated accurately, fixed budgets do not suit and flexible budgets can be used.

Flexible budgets

A budget which recognizes the difference between fixed and variable costs in relation to fluctuations in output, turnover or their variable factors such as number of employees are designed to change appropriable with such fluctuations.


Sales, production, material usage, Material purchase and direct labour budgets for the Grose Limited are depicted on Annexure 02 to this report.


Flossy Limited Cash budget for the period of 03 months is shown in annexure 02 to this report.

Balance at the end of the each month is as follows.

January =£ 25,000

February =£ -125,000

March = £ -45,000

E.) & F.)

Variance calculation for the Frost Production Company Ltd. Is shown in annexure to the report


Operating statement is shown in annexure to this report.


Results of the operating statement shows the snap shot of the differences between the budgets and actual figures, However detail analysis of each cost item is required to make good decisions.

I.) & J.)

Direct material variance of the company indicates that actual proportion of material used are more than the standard proportion since it gives minus figure of 200. Direct material Yield variance examines the differences between the standard yield of the actual material input and the actual yield, both valued at the standard material cost of the product.

Direct labour variance is the difference between the actual direct labor cost and standard direct labour cost for a period of time. In this neither case there is nor difference between the actual and standard cost. Null figure is given due to negative labour rate variance of 800 and positive labour efficiency variance of 800.

Variable overhead cost variance also recorded as Zero indicating there is no difference between budgeted figures and actual. This is as a result of the Unfavorable variable over head expenditure variance of 200 and favorable variance of variable over head efficiency variance of 200.

Finally the fixed over head expenditure variance shows the favorable variance of 400 taking to the consideration of budgeted and actual fixed over head cost. Whereas fixed over head volume variance is recorded as zero.


Collection of Cost Data and Reduction of Business Costs -Those cost helps to consider the timing and risk of the benefits from stock ownership and helped to make good decisions hence price of the firms' common stocks increases.

Planning and controlling cost - Budgeting and other cost information are necessary for the managers who held responsible for a specific item of cost to specify limit on how much can be spent. This limit may be adjusted depending on the activity during the period.