Labour cost and the different types overheads this
Analyzed the organisation’s planning tools for Bright light Ltd
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As a newly qualified Manageemnt accountant of Bright Light Ltd., we have analyzed the organisation’s planning tools, we have done a lot of calculation work also and prepared a report and anlaysis that how the tools of management accounting are useful for decisions making as well as for controlling tools . The following are the details reports, working as well as the analysis is as follows for the top-level management.
It works exclusively for the top-level management and prepares analytical reports on which top-level management take fast decisions as well as they can use the controlling techniques also.
- b) essential characteristics of cost accounting systems
it calculates the cost of product and services.
- Economic order quantity
- ABC analysis
- Stores ledgers
- Input-output ratios
- Level of stocks
- FSN analysis
- VED analysis
Task 2 :
- Marginal Costings: As we know that as per the marginal costings we do the valuation based on variable cost only. The fixed cost is considered as period cost only. We calculate the contribution per units as well as we also calculate contribution per unit of key factors. It is a decision-making tool and it is very much help full for the management for taking short term decisions making. It very helps full tool for the management as we can calculate the break-even points as well as we can calculate the margin of safety. We can also calculate the units to be sold for target profits to be achieved.
Marginal costing is very much help full for following types of decision makings.
- Fixation of the selling price
- Exploring new markets
- Make or buy decisions
- Product mix
- Operate plant or shut down
- Fixation of selling price under normal circumstances
- Pricing in competitions and depressions
- An additional order for utilizing spare capacity
- Export sales
- Outsourcing and idle capacity
- Product mix decisions
- Decisions when there are no key factors
- Decisions when there are key factors
- The plant shut down decisions
- Acceptance of special order
- Adding or dropping of a product lines
- The decision regarding further processings of joint or by-products
- The setting of standard costs for all the resources of production, it is material cost, Labour cost as well as the overheads.
- Once the operation is done we calculate the actual cost.
- We compare the standard cost with the actual costs a find out the variances.
- The management at all level analysed the variances and take the requisite decisions.
Hence we can say that the fixation of standard and uses of standard costing helps the management for controlling the entire operations.
Task 3 :
- (P3) Preparation of Income Statements using Absorption and Marginal Costings
- Absorption Costings
| Statements of profits statements for August using absorption costing | ||
| Units | ||
| Sales | 20,000 | |
| Production | 26,000 | |
| Closing Stock | 6000 | |
| Selling price per unit | £ 32.00 | |
| Variable Cost per unit | £ 14.00 | |
| Total Sales | £ 6,40,000 | |
| Fixed overhead absorption rate per unit | £ 8.20 | |
| Cost of goods sold | ||
| The variable cost of manufacturing | £ 3,64,000.00 | |
| Absorbed fixed Overheads | £ 2,13,200.00 | |
| The total cost of Productions | £ 5,77,200.00 | |
| Production cost per units | £ 22.20 | |
| Add: Opening stock cost | 0 | |
| Less: Closing Stock cost | £ 1,33,200.00 | |
| Cost of Goods Sold(Variable) | £ 4,44,000.00 | |
| Gross Profits | £ 1,96,000.00 | |
| Less: Fixed cost (selling & distributions) | ||
| Fixed Selling & Distribution Overheads | £ 55,000.00 | |
| Total Fixed Costs(selling & distributions) | £ 55,000.00 | |
| Net Profits | £ 1,41,000.00 | |
b). Marginal Costing
- The profits as per marginal costing and absorption costing as same because there is no difference between the absorption rate of fixed production overhead as well as the actual fixed overhead is same, hence there is no over and under absorption of factory fixed overheads. Normally the net profits are different because there are different rates for absorption rate and we see that there is also a difference in the valuation of opening stock as well as closing stock.
a).
5,00,000
7,50,000
50,00,000
90,00,000
12,50,000
26,25,000
| Gamma | Delta | Total | |
| £ | £ | £ | |
| Unit selling price | 10 | 12 | |
| Unit variable costs | 7.5 | 8.5 | |
| Direct materials | 2 | 3 | |
| Direct labour | 2.5 | 3.5 | |
| Variable overheads | 3 | 2 | |
| Contribution per unit | 2.5 | 3.5 | |
| Sales volume (units) | 5,00,000 | 7,50,000 | 12,50,000 |
| Total Contribution | 1250000 | 2625000 | 38,75,000 |
| Fixed costs | 34,50,000 | ||
| Budgeted profit or loss | 4,25,000 |
- b) Calculation of breakeven and margin of safety
| Product | Gamma | Delta | Total |
| Unit Contribution | 2.5 | 3.5 | |
| Machine hours per unit | 2 | 5 | |
| Contribution per machine hour | 1.25 | 0.7 | |
| Product Ranking | I | II | |
| Machine hours available | 3500000 | ||
| Machine hours allocated to: | |||
| Gamma | 1000000 | 2500000 | |
| Delta | |||
| Total Contribution | 1250000 | 1750000 | 3000000 |
| Fixed costs | 3450000 | ||
| Profit or loss made | -450000 |
- Production Budget
- Raw Material Purchase Budgets
| Jan | Feb | Mar | Apr | |
| Opening inventory of raw materials (kgs) | 4,000 | 3550 | 3330 | 3670 |
| Purchases (kgs) | 17,300 | 17,530 | 16,990 | 18,310 |
| Sub total | 21,300 | 21,080 | 20,320 | 21,980 |
| Budgeted materials used in production (kgs) | 17750 | 17750 | 16650 | 18350 |
| Closing inventory (kgs) | 3550 | 3330 | 3670 | 3630 |
- Trade Payable(Creditors) budget
Flexing Budgets and Standard costing
Solution for Tasks:
- Standard Cost Card for one Woody
| Budget Details for 1 Woody | Cost per unit | ||||
| Meter | Per Meter | ||||
| Direct Material: | A40 | 8 | £ 2.00 | £ 16.00 | |
| C320 | 4 | £ 1.50 | £ 6.00 | ||
| Hours | Per Hours | ||||
| Direct Labour : | 5 | £ 5.50 | £ 27.50 | ||
| Budgeted Fixed Overheads | £ 15,500.00 | ||||
| Budgeted direct labour hours | 1550 | ||||
| Budgeted fixed overheads/ hours | £ 10.00 | ||||
| Budgeted Fixed Overheads.units | 5 | £ 10.00 | £ 50.00 | ||
| Budgeted Production units | 310 | ||||
| Staandard Cost for 1 units of Woodeye | £ 99.50 | ||||
- Total Variances, Total Material variances, Labour Variances and fixed overhead variances
- Calculate Price variance, Usage variances, efficiency variance and all fixed overhead variances
| Standard Materials Cost details for actual productions | Actual Materials Cost details for actual productions | |||||
| SQ | ||||||
| A40 | 2520 | £ 2.00 | £ 5,040.00 | 2410 | 2.16 | £ 5,200.00 |
| C320 | 1260 | £ 1.50 | £ 1,890.00 | 1260 | 1.58 | £ 1,990.00 |
| Total | 3780 | £ 6,930.00 | 3670 | £ 7,190.00 | ||
| Actual Production | Actual Production | |||||
| 315 | units | 315 | units | |||
| Total Material Cost Variances | =SMCAP-AMCAP | -£ 260.00 | ||||
| Material Price Variances | AQ(SP-AP) | |||||
| A40 | -£ 380.00 | |||||
| C320 | -£ 100.00 | |||||
| Total Material Price Variances | -£ 480.00 | |||||
| Material Usage Variances | SP(SQ-AQ) | |||||
| A40 | £ 220.00 | |||||
| C320 | £ - | |||||
| Total Material usage Variance | £ 220.00 | |||||
| Budgeted Fixed Overhead(BFO) | £ 15,500.00 | ||||
| Actual fixed Overhead (AFO) | £ 14,670.00 | ||||
| Allocated(Recov) fixed Overheads(RFO) | £ 15,750.00 | ||||
| Standard Fixed Overhead(SFO) | £ 16,000.00 | ||||
| Total Fixed Overhead Variances | £ 1,080.00 | (RFO-AFO) | |||
| Fixed Overhead spending Variances | £ 830.00 | (BFO-AFO_ | |||
| Fixed Overhead Volume variances | £ 250.00 | (RFO-bFO) | |||
| Fixed Overhead Capacity Variances | -£ 250.00 | (RFO-SFO) | |||
| Fixed overhead Efficiency Variances | £ 500.00 | (SFO-BFO) | |||
- Reconciliation Statements
- We can see that there is an Unfavourable balance of Material Price Variances, But material usages variances are favourable, Labour rate is increased but the efficiency of labour has increased, fixed overhead spending variance has reduced.
- Purpose of planning and budgeting process. We are very much aware that all the business and business model is working for the future. Unless we do the proper planning as well as do the budgeting we would be able to fix the target or we would be driving our businesses into goalless directions. Hence the first thing we need for running a successful business or running any operations we must make a plan as well as budgets.
- Advantage of budgetary control
Budgeting process and budget make the management to look for the future .
It increases the production efficiency of the management as well as the entire operations.
Budgeting also helps in increasing efficiency.
- We have just discussed above that even marginal costing tools like break-even analysis as well as margin of safety analysis help for fixation of budgets.
- There are so many problems we are facing in the long term as well as short terms financial activity. We have seen there are a lot of issues like product mix decisions, sales mix decisions, controlling decisions as well as achievements of the decisions of the operational target. Management accounting tools consist of everything which helps us in solving these issues.
Make or buy decisions, Limiting factors decisions, Breaking into a new market. These are the issues are taken care of by the management accounting tools. As we have seen in the part one as well as part two that while budgeting and planning or while running the business operations we have solved these issues very easily by using the marginal costing tools.
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My Accounting Course. 2020. What Is Management Accounting? - Definition | Meaning | Example. [online] Available at: <https://www.myaccountingcourse.com/accounting-dictionary/management-accounting> [Accessed 13 June 2020].
Merriam-webster.com. 2020. Definition Of LIMITING FACTOR. [online] Available at: <https://www.merriam-webster.com/dictionary/limiting%20factor#:~:text=Definition%20of%20limiting%20factor,factor%20for%20many%20deer%20herds> [Accessed 13 June 2020].
Accounting, M. and Disadvantages, B., 2020. Budgetary Control | Meaning | Objectives | Advantages | Disadvantages. [online] Accountlearning.com. Available at: <https://accountlearning.com/budgetary-control-objectives-advantages-disadvantages/#:~:text=Budgetary%20control%20is%20the%20process,corrective%20actions%20without%20any%20delay.> [Accessed 13 June 2020].
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