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Budgeting
Individual Assignment
ACKNOWLEDGEMENT
Firstly I would like to thank our lecturer Mr Anuruddha Yapa, who gave me full support on
the assignment from the day he presented to us. She never made us bored and all of his
classes were full of joy and pleasure, therefore as an individual I have gained a good
knowledge about the module which is Managing Financial Resources & Decisions. The
subject has designed in a way that provides the current issues and opportunities an
organization could face in a Management Accounting, Costing and Budgeting
Secondly my sincere thanks to the management of ICBT who gave me the opportunity to
follow HND in business management and for giving such an excellent experience to do an
assignment that I had on this particular subject. Thank you to all my colleagues who gave
thoughtful ideas to carry out the assignment and gave to critics to improve my writing skills
in an effective way. I could confidently say that the support from everyone had helped me do
this particular assignment without any hassles.
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Executive Summary
This paper explains about the Management Accounting in terms of costing and budgeting. It
has become one of the vital areas in most of the organization. Today many Companies are
moving forward with their business and it is a must factor that the cost should be maintained
in a way that could increase the performance effectiveness. The assignment brief gives an
opportunity to understand the different scenario about costing and budgeting and how it
should be looked in a way to improve the standard. The paper starts with understanding the
different costs and methods that exist in the world of business. These particular methods help
and lead the Companies to understand the business in a better way.
This assignment is also based on the advantages and disadvantages of budgeting and costing
that will provide to a company. It helps the company to identify their finance standards and
how to handle the current situations in the business. Later on the marginal and absorption
costing are calculated for the Mobile Phone Company. The third question is based on LIFO,
FIFO, Average price and Standard price.
Other part of the assignment is about Star Limited and its Calculations are on Zero based
methods. The calculations such as production quantity, material usage, and material purchase,
direct labour and budgeted profit and loss account. This whole assignment has provided the
insights of costing and budgeting. Every Company should make sure that the costing &
budgeting is maintained in a high standards. This would help the organizations to compete in
the market for a long time.
The Company has to be aware that the budget is carried out with correct and reliable
information which would bring the real outcome results for the Company. It can create
valuable decisions such as pricing, profit sharing, etc. So it is clear that the budget & costing
will create a great total of impact on each & every organization in the world. Therefore the
assignment portrays the significant if budgeting and costing and also how it should be
maintained in a way that will give a clear picture about the Company and how they operate in
the market place with high standards.
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Contents
ACKNOWLEDGEMENT............................................................................................ 1
Executive Summary............................................................................................... 2
Introduction........................................................................................................... 4
1. Different types cost........................................................................................... 5
2. DIFFERENT TYPES OF COSTING METHODS.........................................................7
Interpretation....................................................................................................... 26
CONCLUSION....................................................................................................... 27
REFERENCES........................................................................................................ 28
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Introduction
These days so many organizations are focusing on costing and budgeting to get their
objectives and goals in and valuable way. It helps to decide the financial issues that happen
in the business environment. These financial issues can be related to develop decisions,
pricing decisions, wage control and material cost. This will make any companys financial
structure strong and also it can carry out in a competitive environment.
Normally costing is evaluated by using the past information in order to make a decision with
the current expenses but the budget is something which talks about the future and how the
capital can be utilized in an appropriate way. It would compose the Companies to identify
with the business performance and how it may possibly to move towards to the next level.
Many organizations have their own services to take out the costing and budgeting activities
because it has the power to come to a decision the companys success in the long run.
Nowadays finance is one of the key areas in any unit which needs to supported by others
departments as well.
American water has been maintaining their costing and budgeting by using educated
employees and part of the assignment would make clear about the types of costing which is
being used by the Company. Since the Company is one of the largest water providing
companies in Sri Lanka, it is their responsibility to produce quality water services for the
people. It might be achieved by eliminating the unnecessary cost that is related to the
services. As well this will direct the consumers to get the high quality product/services in a
low price. Therefore every company must focus on having a good and successful costing and
budgeting.
The report gave the opportunity to understand the marginal and absorption costing. This is
imports for all the organization and employees must ensure the procedures are followed
according to the requirement. The ignorance will cost many issues that will affect the
companys business functions. Therefore the organizations must take is into consideration in
a massive manner.
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LEARNING OUTCOME 01
Fixed and
variable
Cost
Sunk
Cost
Types of Cost
Opportuni
ty Cost
Marginal
Cost
Cos
t
Average
Cost
Direct
and
indirect
Figure 1
Today environment need to know the different types of cost that are in the business. This
knowledge will help the organizations to classify the different types of cost and raise their
functions in a better way. Normally there are many types of cost existing in the world of
business and the types are given below and are briefly discussed. Every cost element will
explain the different way that a business can handle and how it can improve it to survive in
the environment.
There are many different costs that exist and every organization must understand what is
important for them and how they must use in order to reduce the unbalance of the business.
It may increase the chances to create the competitive advantage and also to sustain the
business with high reputation.
FIXED COST
This is one of the common costs that occur in the business and it doesnt change according to the
business activity within a period of time. Furthermore it wont change based in the output/turnover
and it will remain in a constant manner. Some of the examples are rent, insurance premium, executive
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salaries, depreciation and incense fee. Therefore the given cost are inter related to a specific period of
time. It can be clearly mention that the fix cost incur based on the time scale and not on the level of
activity.
VARIABLE COST
This is known as the opposite of the fixed cost which can be change based on the business activity.
Normally it changes according to the quality of the output that produced and it has a direct
relationship with the production. Many Companies show a great interest towards this cost and also to
find ways to reduce so it would bring profits to the relevant unit. The following are the examples for
variable cost.
Packaging cost
MARGINAL COST
Marginal cost is based on the total cost and the quality produced in a business. It is the change that
occur in the total cost which will happen when the quality change by one unit. Also it is known as the
additional cost that involves in the each level of production. This additional cost needs to be
monitored to keep up the performance in a positive way.
E.g. In order to make an extra table it will involve the additional cost of wood and labour
OPPORTUNITY COST
An opportunity cost is a cost that measures the opportunity that is lost or sacrificed when the
choice of one course of action requires that an alternative course of action be given up. It is
important to note that opportunity costs only apply to the use of scarce resources.
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Unit
Costing
Operati
ng
Costing
Job
Costing
Costin
g
Contract
Costing
Proces
s
Costin
Batch
Costing
Figure 2
UNIT COSTING
This method is used for products which can be known as indistinguishable quantity and also
can be related to the manufacturing process that happens in a continuous basis. For example
paper manufacturing. In simple terms this cost allocated to a selected unit and commonly
calculated as the cost over a period of time divided by the number of items produced. Also
unit cost includes all fixed and variable costs that are involved in the production. This is one
of the significant costing methods which help to Companies to grow, lower the unit cost it
can achieve through economies of scale.
JOB COSTING
It is related with the job function and normally the information collected based on the job in
order to make necessary decisions. It is the process of tracking and understanding the
expenses that incurred on a job against the revenue that has been produced by the job. This is
one of the vital costing methods for the Companies which are pairing a relatively high value
volume per customer with a relatively low number of customers such as building contractors,
architects, etc.
PROCESS COSTING
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Process costing is an accounting rule that traces and totals the direct costs and allocates the
indirect costs of a manufacturing process across the number of units produced.
Manufacturing costs are assigned to products manufactured in large groups, and costs are
assigned to manufactured units on an average cost basis. Process costing involves certain
speculations about standard costs and can be subjective; therefore, process costing is only
appropriate for companies that make large numbers of units thousands or millions of units
per month. Developing a robust and perfect process costing system is important because
inaccurate costs will misrepresent the financial picture of the company.
Today most of the Companies are showing great concern about process costing and they
have understood that it will make an impact on the organizations day to day activities.
Therefore maintaining the cost in an effective manner would increase the capacity of a
business firm and also to produce a strong financial structure to the Company.
BATCH COSTING
This method is used for products which are based on batch production and to make an easy
task, each batch is considered as a separate unit. Generally this costing applies for where
quantity of identical items is manufactured as a unique batch. In a similar way to job costing,
batch costing is used in situations where a specific customer order determines the work to be
done. However, job costing is for situations where a single cost unit is being made (e.g. a
single item of bespoke furniture) whereas batch costing is used where a unique batch consists
of identical items (e.g. a printing company producing a bespoke batch of 1000 identical A4
adverts).
360,000
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Individual Assignment
340,000
(85,000)
(255,000)
105,000
(80,000)
25,000
540,000
425,000
85,000
(127,500)
(382,500)
157,500
(80,000)
77,500
Figure 3
Figure 4
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840,000
510,000
85,000
(595,000)
245,000
(80,000)
Selling and
administration
Net profit
165,000
Figure 5
Sales
(-) production cost
Production cost (8.5 x
60,000)
Opening stock ( 8.5x
10,000)
Contribution cost
510,000
85,000
(595,000)
245,000
(80,000)
Selling and
administration
Net profit
165,000
Figure 6
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220,000
(55,000)
(165,000)
Contribution
195,000
(120,000)
Selling and
administration
(80,000)
Net profit
65,000
Figure 7
55,000
(82,500)
275,000
(247,500)
contribution
292,500
(120,000)
Selling and
(80,000)
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administration
Net profit
92,500
Figure 8
840,000
82,500
357,500
(55,000)
(385,000)
455,000
Fixed cost
(120,000)
Selling and
administration
(80,000)
Net profit
255,000
Figure 9
330,000
contribution
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55,000
(385,000)
455,000
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Fixed cost
(120,000)
(80,000)
Net profit
255,000
Figure 10
LIFO
Receipt
Date
GR
N
06/08
06/12
xxx
xxx
06/22
xxx
Figure 11
Recei
pt
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GR
N
FIFO
Issu Issue
e
Numb
Issued
Details
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Balance
Date
06/08 xxx
06/12 xxx
06/22 xxx
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Date
200
150
125
0.2
0.2
5
0.3
0
475
er
40
37.
5
06/1
8
xxx
06/3
0
xxx
37.
5
115
B/C/F
200*0.2 =4
150*0.25=3
.5
200*0.2=40 135*0.25=3
15*0.25=3.7
.75
5
135*0.25=3
.75
125*0.30=3
.5
135*0.25=3
3.75
10*0.3 =3
115*0.30=3
4.5
10
3
475
115
Figure 12
Standard pricing
Recei GR Quant
pt
N
ity
Date
Pri
ce
Tot
al
06/0
8
06/1
2
0.1
5
0.1
5
30
06/2
2
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Xx
x
xx
x
xx
x
200
150
125
0.1
5
Issu
e
Dat
e
Issue
Num
ber
Issued
Details
Balance
22.
5
06/
18
xxx
215*0.15=
32.25
06/
xxx
250*0.15=
18.
75
350*0.15=
52.5
135*0.15=
20.15
260*0.15=
39
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30
375
10*0.15=1.
5
475
71.
25
B/C/F
10
1.5
475
71.25
Figure 13
Receipt
Date
GR
N
06/08
06/12
Xxx
xxx
06/22
xxx
Quanti Pric
ty
e
200
150
125
0.2
0.2
5
0.3
Average pricing
Tota Issu Issue
l
e
Numb
Dat
er
e
40
37.
5
6/1
xxx
8
Issued
Details
Balanc
350*0.2
77
215*0.22=
47.3
135*0.2
29.7
260*0.2
67.6
37.
5
6/3
0
xxx
250*0.26=
65
10*0.26
6
475
115
B/C/F
10
2.6
475
115
Figure 14
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Individual Assignment
LEARNING OUTCOME 03
1. COMPANY BACKGROUND-AMERICAN
PREMIUM WATER
SYSTEMS
American Premium Water Systems was established in February 2005 as a joint venture with American
Liquid Packaging Systems Inc., Pride International (Pvt) Ltd and The Trend Group of Companies in
Sri Lanka. These three Companies have successfully contributed their efforts in order to create
American Water as the number one bottled drinking water brand in Sri Lanka. The Companys core
focus is to produce a clean and hygienic water to quench the thirst. The advanced research
technologies helped the Company to follow an effective packaging and disposal methods which
would eliminate the redundant production cost. The quality and standards are maintained in order to
satisfy the clients for many years.
MISSION
To provide high quality products to the customers the Company has been stable with their mission
statement which is educated by the Management to all their employees. The brand is widely
recognised in Sri Lanka through their logo which is distinguished from other competitors. Following
is the mission statement of American Water.
VISION
The vision of the Company was invented from its founders to clearly express the long term focus of
which is based identifying opportunities and creating the success for the employees. Each year the
Company evaluates their performance by recruiting young talents to bring up new ideas to build
professional relationship in the industry. The vision of American Water is given below.
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To be the leader in providing purified drinking-water in the South Asian SAARC region, enriching
shareholder and stakeholder interests, while creating opportunities for employees to share in the
groups success
PURPOSE OF BUGETING
Since American Water Systems is one of the largest water producing Companies in Sri Lanka, they
must understand the gravity of maintaining a proper budget for their organization. Budget is a process
and also known as a quantitative plan which is used as a tool in order to decide the activities that will
be chosen for the future uses. The budget helps American water to plan their business activities in an
effective way. The Company is aware that it is a vital aspect for them and also it will help them to
produce a good performance internally and externally. Therefore the Company must make sure that
they provide accurate information in order to develop a budget which could be used for the future
needs.
Today American Water System prepares their budget annually in order to focus the future needs of
the Company. It helps the Company to see the business activities in a proactive manner and also to
carry out the day to day activities in a most effective manner. The Management is aware that the
budget should be prepared to cater the needs of the Company and also the amendments should be
made to according to the changes that could happen in the business environment. The below are some
of the points that budget helps American water to move forward in the business.
Helps to forecast the future and make the necessary adjustment in the business functions
Plays a major role in business sustainability and also to carry out good best practices
It will create a credibility among the employees and also to retain them in the Company
Understand the economic changes and other changes that occur in the business environment
and how it should be taken into consideration
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It helps the Company Managers to be more focused and identify the relevant areas
It will be a motivating tool for the employees and Managers so they can use it as a statistic
Helps to evaluate the Company performance and make changes in the current business
activities
It will help the Company to understand and move forward with businesss day to day
activities
Following are some of the disadvantages of the budgeting. These factors need to be considered by
American Water System in an appropriate manner. A small error could bring massive outcomes to the
performance of the Company. Therefore understanding will help the Company to be more focused and
also to learn the business environment.
One wrong decision will create a massive change in the Company and it will affect the
Companys internal and external stakeholders
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2.
Flexed budget
5500 units
9,500
Actual result
5500 units
9,900
Budgeted
variance
400-adverse
Fixed budget
7000 units
31,405
11,000
Actual result
5500 units
29,200
9,900
Budgeted
variance
2205- favorable
1100-favourable
Indirect labor
Expenses type
Variable
Indirect
labour
overheads
Fixed overheads
consumables
Variable
overheads
Fixed overheads
22,500
25,000
22,500
20,250
83,040
40,000
81,850
29,200
22,500
22,500
98,500
81,850
16650favourable
4750favourable
1190-favourable
10800favourable
Figure 15
3.
Zero budget
1. Sales budget
50*70,000
3,500,000
2. Production budget
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Sales
70,000
(5,000)
65,000
4,000
Production required
69,000
69,000*3
207,000
WZ
69,000*3
207,000
WZ
Usage
(-) opening stock
207,000
(10,000)
207,000
(9,000)
197,000
15,000
198,000
13,500
Unit cost
212,000
1
211,500
2
Total
212,000
423,000
finishing
Production unit
69,000
69,000
276,000
138,000
Total
1,656,000
1,104,000
6. FPOH
3,500,00 * 5%
175,000
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15,000 * 1
13,500 * 2
Total
15,000
27,000
42,000
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Labor
$
3
6
XY 3 * 1
WZ 3 * 2
P4*6
F2*8
$
9
24
16
40
49
4000
196,000
250,000
3,381,000
3,631,000
(196,000)
3,435,000
11.
3,500,000
Cost of sales
(3,435,000)
Gross margin
65,000
FPOH
175,000
200,000
loss
310,000
Cash budget
JULY
AUGUST
SEPTEMBER
Opening Balance
27,750
45,000
47,500
INSURANCE
7,000
CASH SALES
45,500
47,000
57,000
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TOTAL CASH
AVAILABLE
Individual Assignment
80,250
92,000
104,500
FOR DEBTORS
19,250
28,500
38,500
TAX
6,000
6,000
6,000
WAGES
5,000
5,000
5,000
OVERHEADS
5,000
5,000
5,000
TOTAL PAYMENT
(35,250)
(44,500)
(54,500)
CASH B/C/F
45,000
47,500
50,000
PAYMENTS
SALES
JULY
MARCH
JUNE
JULY
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AUGUST
JUNE
JULY
AUGUST
SEPTEMBER
JULY
AUGUST
SEPTEMBER
PURCHASE
JULY
JUNE
JULY
AUGUST
JULY
AUGUST
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28,500
SEPTEMBER
AUGUST
SEPTEMBER
13500
12000
1500(A)
Usage variance
2000 (A)
12500
12000
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500(A)
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2. DLV
Rate variance
9500
9000
500(A)
Efficiency variance
1940 (A)
9000
7560
1440(A)
3. V O/H VARIANCE
Expenditure variance
13900
12993
906.25(A)
Efficiency variance
700(A)
12993
13200
206.25(F)
VOAR = 4.125
FOAR = 3.59375
OAR = 3.21875
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4. F O/H VARIANCE
Expenditure
variance
12500
Capacity
variance
Volume
variance
1000(A)
11,500
11,320.31
11500
1000(A)
Efficiency
variance
11320
11500
179.69(A)
179.69(F)
Efficiency
variance
26400
24700
1700(A)
Volume variance
1700(A)
24,314.06
24700
385.94(A)
385.94(F)
Price variance
Quantity variance
2400
2250
Total sales
marginal
150(F)
sales marginal
mix
180(A)
Volume variance
2430
2700
300(A)
450(A)
270(A)
550 * 2 = 1100
250 * 3 = 750
100 * 4 = 400
2250
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w = 450 * 2 = 900
900
x = 270 * 3 = 810
Y = 180 * 4 = 720
2430
W = 500 * 2 = 1000
X = 300 * 3 =
900
Y = 200 * 4 =
800
2,700
Interpretation
Direct material variance shows an adverse of 2000, they have purchased the products at a
high price; this can be reduced by obtaining trade discounts
Direct material usage has a 500 adverse; the problem may be incorrect estimated value
The labour efficiency rate of 1650 favourable while direct labour variance is 1940 adverse; it
means the company has paid the employees more than budgeted amount to be paid.
The variable overhead expenditure variance is 700 adverse. The reasons may be it could be
due to the efficiency of the employees
The sales price variance is 150 favourable which one of the best strategies in a business.
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CONCLUSION
Every organization in the world function with certain objective and it helps the country and
the society to live a standard lifestyle. Managing Accounting helps the Companies to forecast
about the future and make necessary decision making. Today the world is moving in a rapid
manner and the Companies must be ahead of the changes. This particular paper discusses
about the costing and budgeting in different scenarios and each outcome of the assignment
depicts different Companies and situations. The assignment gives an understanding that they
are many types of costing available for the organizations and also there are different costing
methods used in day to day business. The budgeting process helps the Companies to have a
clear control on their performance and also to motivate the necessary parties to take the
business to the next level. From the budget a Company could able to manage the relationship
between the income and expenditure. If the relationship maintains in an effective way, it will
motivate the employees and also the Company can easily achieve their set goals and
objectives.
Most of the scenarios budget wont be an accurate amount since many factors will have an
influence on that particular amount. As already discussed in the above paper, some of the
factors are uncontrollable and it needs to be adjusted according to the change that happens in
the market. In certain times Companys budgeted profit will be lesser that the actual profit
due to the economic and other changes. The main advantage of having a budget is that the
Company can see their future and they can make the decisions to improve it in further way.
Also it gives a clear picture for all the stakeholders and they also can evaluate the Company
performance and level of investment. Therefore it is more evident that the budget plays an
important role in Companys performance in the long run.
Most of the Companies do their own budgeting calculations whereas some have their outsourcing
Companies to handle their budgeting. The main reason to outsource this process is that generally it
consumes time and therefore it needs to be done with more care an effort. As a whole this assignment
provides the insight of costing and budgeting and how Companies must control in order boost their
performance. Also it has given a clear picture to understand the underlying factors of maintaining a
good budget for a Company.
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from:
http://http://www.businessnewsdaily.com/5498-direct-costs-indirect-costs.html
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Individual Assignment
'Fixed Costs', Investing Answers, 2015, Accessed: 14th December 2015, Source:
from:
http://http://www.investinganswers.com/financial-
dictionary/economics/fixed-costs-2948
Marginal Cost of Production', Investopedia US, 2014, Accessed: 14th December
2015,
Source:
from:
http://http://www.investopedia.com/terms/m/marginalcostofproduction.asp
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