Accounting

CONTENTS PAGE MANAGEMENT ACCOUNTING

Task 1 Page No.
Identify different types of cost that BCC (PVT) Ltd would incur during their

Operation…………………………………………………………………………….….…………..4

1.2 explain in detail the different types of cost mentioned above……………...………….4

1.3 explain with different examples why different costing methods are used by
organizations in modern context ………………………………………..……….……..…….…10

1.4 calculates the breakeven point in value & units for BCC (PVT) Ltd ……….…….……19

1.5 if firms selling capacity is 25000 units what would be the profit or loss of BCC

(PVT) Ltd……………………………………………………………………………………….……..19
1.6 what would be the number of units that BCC (PVT) Ltd needed to produce

In order to make sure $ 20000 profit…………………………………………………….…….….19

1.8 Show above details under other stock recording method………………..……………….21
1.7 What is the stock recording method used by BCC (PVT) Ltd……………………………20

1.10 prepare an income statement for BCC (PVT) Ltd based on absorption costing
1.9 If the firms sell above issue at 20 per unit what would be the profit or loss of
approach……………………………………………………………………………..……………….…23
BCC (PVT) Ltd under FIFO, LIFO, and AVECO……………………………………………………22

1.11 prepare an income statement for BCC (PVT) Ltd based on marginal costing

Approach……………………………………………………………………………………….……….24

1.12 Make recommendations and justify your recommendations through

Calculations……………………………………………………………………………………………..24
1

MANAGEMENT ACCOUNTING

Task 2
Page No.
2.1prepare a routine cost report for magna moss (PVT) Ltd based on above

Information and identify the cost per ton…………………………………………….………..26

2.2 Evaluate the indicators of productivity, efficiency and effectiveness of

An organization like Magna Moss (PVT) Ltd…………………………………………….……27

2.3 Explain in detail the principle of quality & value for any organization…………….….31

2.4 Identify and asses potential improvements for Magna Moss (PVT) Ltd………………37

Task 3
Page No.
3.1 explain in detail the purpose and the nature of the budgeting process for

an organization like Ramona (PVT) Ltd………………………………………………………....47

3.2 assess different budgeting method and its need for Ramona (PVT) Ltd………….…..51

3.3 prepare relevant budgets in order to draw up a master budget for Ramona

(PVT) ltd…………………………………………………………………………………………………55

3.4 prepare a cash budget for the first three months for Ramona (PVT) Ltd……………….58

Task 4
Page No.
Task 4
Page No.
4.1 calculate variances for the data presented for your soccer team………………………..59

4.2 identify possible causes for the variances and recommend corrective action…………
604.1 calculate variances for the data presented for your soccer team…………………

4.3 prepare anpossible causes for the variancesbudgets & actual results for action……
4.2 identify operation statement reconciling and recommend corrective your 2

4.3 prepare an operation statement reconciling budgets & actual results for your

school soccer team………………………………………………………………………………


Task 4
Page No.

4.4 Explain responsibility centers of an organization…………………………………….….63

4.5 prepare a report on your finding in accordance with identified responsibility

centers to the manager of the soccer team……………………………………………………66

3


1.1
Identify different types of cost that BCC (PVT) Ltd would
incur during their operation.

 Fixed cost

 Variable cost

1. Direct material

2. Direct labor

1.2 explain in detail the different types of cost mentioned
above
Before we are looking in to the cost of BCC (PVT) ltd first we need to understand some basic
theory of cost now we will look at them

What is a cost?
A Cost can be identified as the total expenses attributed to a specific item or activity. (CIMA
MANAGEMENT ACCOUNTING AND PERFORMANCE EVALUATION OFFICIAL STUDY TEXT
2007)

What is cost unit?
Cost unit is defined as a unit of product or service in relation to which costs are ascertained.
(CIMA MANAGEMENT ACCOUNTING AND PERFORMANCE EVALUATION OFFICIAL
STUDY TEXT 2007)

For example- call minutes (mobile phone bills)

What is cost centre?
Cost centre is defined as location or activity for which costs are humiliated it is a collecting place
for cost (CIMA MANAGEMENT ACCOUNTING AND PERFORMANCE EVALUATION
OFFICIAL STUDY TEXT 2007)

For example- raw material stores, production flows and canteen are all cost centers in a
manufacturing company

4


Prime cost
These are cost that we can directly identify with the product or service

For example- direct material, direct labor, and other direct expenses (CIMA MANAGEMENT
ACCOUNTING AND PERFORMANCE EVALUATION OFFICIAL STUDY TEXT 2007)

What is direct material cost?
A direct material cost is any material cost that can be identified specifically with a final cost
objective (e.g., a particular contract (CIMA MANAGEMENT ACCOUNTING AND
PERFORMANCE EVALUATION OFFICIAL STUDY TEXT 2007)

Overheads (indirect cost)
Production over heads
These are cost related to production that cannot be directly identify with a product

For example- factory rent, machinery rent (CIMA MANAGEMENT ACCOUNTING AND

Selling and distribution overheads
These are cost related to sales and distribution that cannot be directly identify with the product
or service(CIMA MANAGEMENT ACCOUNTING AND PERFORMANCE EVALUATION

For example- transportation cost, sales commissions

Elements of cost
The below cost statement shows the buildup of the total cost for a product or services sample
amounts are taken to explain this statement

cost statement

Details amount

direct materials 15
direct labor 5
other direct expense 2
prime cost 22

production overheads 16

5


total production cost 38

selling and other overhead 2

total cost 40

profit 10

selling price 50

STUDY TEXT 2007)

Cost behavior
Cost behavior refers to the way in which costs are affected by fluctuations in activity the most
common cost behaviors happen are as follows. (CIMA MANAGEMENT ACCOUNTING AND

Fixed cost
Fixed cost does not change with the level of activity despites changes to the level of activity this
cost remain unchanged. (CIMA MANAGEMENT ACCOUNTING AND PERFORMANCE
EVALUATION OFFICIAL STUDY TEXT 2007)

Value

Activity level

FIGURE 1.1

Examples of fixed costs include rent

For example

Production (units) Rent cost in rupees
10000 20000
50000 20000

6


100000 20000
120000 20000
FIGURE 1.2

Step fix cost
These cost stay fix up to a certain level of production but when a level is reach it will increase to
the next step(CIMA MANAGEMENT ACCOUNTING AND PERFORMANCE EVALUATION

Value

Activity level

FIGURE 1.3

For example – 1-10 people can travel in a van at the same cost but when the number increase
by one the cost will move on to the next step

Variable cost
Costs that change in proportion to production are variable costs. This means when the
production level is changing the variable cost will change(CIMA MANAGEMENT ACCOUNTING
AND PERFORMANCE EVALUATION OFFICIAL STUDY TEXT 2007)

For example- the raw material cost will increase with each additional unit produce

Value

Activity level

FIGURE 1.4

7


Semi variable cost
Semi variable cost is a cost containing both fix and variable and component and which is thus
party affected by changes to the level of activity. (CIMA MANAGEMENT ACCOUNTING AND

Value

Activity level

FIGURE 1.5

For example the monthly phone bill has a rental fee plus call

Conclusion
We can divide the main cost in to two types they are

 Fixed cost

 Variable cost

By using the fixed cost we can calculate the operation gearing of the company this means the
fixed cost effect on sales and operation profit

Operational gearing is simple and important in modern business world

High fixed costs increase operational gearing. Consider two companies A and B with different
cost structures but the same profits.

Company A Company B

sales 100000 100000

Variable cost 70000 80000

Fix cost 20000 10000

8


Operating profits 10000 10000

FIGURE 1.6

Although the companied fixed cost and variable cost are showing different amts the operating
profit for both companies are same

Now assume both companies increase sales by 50%

Company A Company B

sales 150000 100000


Fix cost 20000 10000

Operating 25000 20000
profits

FIGURE 1.7

A company is showing highest operation gearing, makes 2.5× as much profit as it did before the
50% increase in sales

B Company is only able to double its operation profit this is due to high variable cost

Fixed cost is fixed it won’t change but the variable cost will vary according to the production
units applying a high low method an equation that could be use to forecast total cost for
example

month patients Total cost

1 5000 37500

2 8400 45660

3 8300 45050

4 5900 39420

FIGURE 1.8

Working

(45660-37500)/(8400-5000) = 2.4

2.4*5000= 12000

37500-12000= 25500 fixed cost

So y = 25500+2.4x

9


If we have the formula we can easily calculate the cost for the products without wasting
time

1.3 explain with different examples why different costing
methods are used by organizations in modern context
If a company already has an established costing method, in most cases, they should stick with it
unless they have compelling reasons to change.

Organizations are different from each other due to number of reasons

1. Legal situations

2. Organizations are made up of different individuals

3. Organization engage in different activities

Based on different activities under taken organizations can have their own costing systems

 Job manufacturing – job costing

 Batch manufacturing – batch costing

 Contract manufacturing – contract costing

 Process manufacturing – process costing

 Service providers – service costing

Job costing
Job costing is the costing method used by organizations which are engaged in one off jobs. One
off jobs are normally undertaken according to specific customer requirements and are relatively
short duration. Cost accounting is through opening in a new document for each job undertaken
and any cost amount incurred in performing the job is also recorded in the document allowing
the organization to identify the total cost of the job (CIMA MANAGEMENT ACCOUNTING AND

Batch costing
This is the costing method used by organizations which are engage in lot of production activity
here the cost accounting is through opening in a new document for each order receive and by
recording all the relevant cost in delivering the order such a document is normally known as

10


batch cost card (CIMA MANAGEMENT ACCOUNTING AND PERFORMANCE EVALUATION

Contract costing
Contract costing is the costing method used by organizations with following characteristics

 Long term

 Work done at customer site

 Cost accounting is through

STUDY TEXT 2007)

Service costing
Service costing is the cost accounting method used by organization with following characteristic

 Perishable

 Intangible

STUDY TEXT 2007)

Process costing
Process costing method is the cost accounting method use by the organization who are in to
continuous production. Most process manufacturing organization use more than one process in
the total operation (CIMA MANAGEMENT ACCOUNTING AND PERFORMANCE

In reality not every input is likely to be converted to good units there can always to be defective
unit this gives three situation

1. Expected or normal loss – with continuous production undertaken process managers are
likely to identify particular number of units as defective which are inherent to the process
such inherent units are known as normal losses(CIMA LECTURER STUDY TEXT 2007)

2. Abnormal loss – if the actual loss is more than the normal loss that additional loss is
known as abnormal loss (CIMA LECTURER STUDY TEXT 2007)

11


3. Unexpected or abnormal gain – if the actual loss is less than the normal loss the
difference between these is known as abnormal gain (CIMA LECTURER STUDY TEXT
2007)

In process costing due to lack of resources or time available there is always work in progress
which is normally identify in relative and percentage terms these percentage need to converted
to equal number of completed units. If the process is manufacturing more than one type of
products which are having equally high amount of value such products are known as joint
products in process costing joint products are normally identified at the end of the process in
joint product some products are not salable immediately where more work is required cost
incurred with this more work is known as further processing cost (CIMA MANAGEMENT

Example of how process costing calculations

The following information is available for process 2 in September

Transfer from process one 400kg at a cost of 2150 rupees

Material added 3000kg 6120 rupees

Conversion costs 2344 rupees

Output to finished goods 2800kg

Output scrapped 400kg

Normal loss 10% of material added in the period

There was no opening work in progress but 200kg were in progress at the end of the month at
the following stage of completion

Materials 80%

Conversion cost 50%

The scrapped units were complete in material added but only 50% complete in respect of
conversion costs all scraped units have a value of 2rupees each

Wanted to write up the accounts for process

Process one 400kg P1-2150 finished good 2800kg

Material 3000kg M-6120 normal loss 300kg

C.C-2344 Abnormal loss 100kg

Closing work in progress

12


200kg

FIGURE 1.9

Statement of equivalent

input quantity output quantity Process 1 material Conversion
cost

Process 1 400kg Finish good 2800kg 2800kg 2800kg 2800kg

material 3000 kg Normal 300kg - - -
loss

Abnormal 100kg 100kg 100kg 50kg
loss

Closing 200kg 200kg 160kg 100kg
work in
progress

Total 3400kg 3100kg 3060kg 2950kg

FIGURE 2

Statement of cost

Process 1 material Conversion cost

Input cost 2150 6120 2344

Scrap value (600)

total 1550 6120 2344

Cost per equivalent 1550/3100=.5 6120/3060=2 2344/2950=.79

FIGURE 2.1

Statement of evaluation P1= .5*2800=1400

Finished goods M=2800*2=5600 9240

13


C.C=2800*.79=2212

P1=100*.5=50

A.L M=100*2=200 290

C.C=50*.8=40

P1=200*.5=100

CWIP M=160*2=320 500

C.C=100*.8=80

FIGURE 2.2

NL =300*2=600

Process accounting

Detail quality value Detail quality value

Process 1 400kg 2150 Finish goods 2800 9240

material 3000kg 6120 Abnormal 100 290
loss

Conversion 2344 Normal loss 300 600
cost

Closing work 200 500
in progress

14


3400kg 10614 3400kg 10614

FIGURE 2.3

In addition to main cost accounting systems to handle overheads there are two main
overhead cost accounting systems

1. Absorption costing

2. Marginal costing

Marginal costing
Marginal costing is formally defined as

‘Accounting system in which variable costs are charged to cost units and the fixed costs of the
period are written-off in full against the aggregate contribution this contribution mainly used in
decision making. (CIMA MANAGEMENT ACCOUNTING AND PERFORMANCE EVALUATION

Absorption costing
Absorption costing is a very old method where it was develop when organization were focus on
production so the o/h looked at his traditionally production o/h.OAR is calculated to relate the o/
h to end product for decision making purpose where now budgeted information is used if the
OAR is budgeted or the period which actual o/h there can always been differences (CIMA
2007)

Example

A company produces and sells one product only which sells for 50 rupees per unit. there were
no stock at the end of may and other information is as follows

Standard cost per unit

Direct material - 18

Direct wages - 4

Variable production overhead – 3

Budgeted and actual costs per month

Fixed production overhead – 99000

15


Fixed selling expense

Fixed administration expenses

Variable selling expenses 10% of sale value

Normal capacity is 11000 units per month

The number of units produced and sold was

June July

Sales 12800 11000

Production 14000 10200

Required

1. Absorption costing

2. Marginal costing

Absorption costing

June July

Sales revenue 640000 550000

Less- cost of sale

Opening stock 40800

production 476000 346800

Closing stock 40800 13600

Over/under absorb 27000 7200

less non production cost


Fix cost 40000 40000

16


Net profit 127800 73800

FIGURE 2.4

Marginal costing

June July

Sales revenue 640000 550000

Less- cost of sale

Opening stock 30000

production 350000 255000

Closing stock 30000 10000

Variable non production cost 64000 55000

Contribution 256000 220000

less non production cost

Fix production cost 99000 99000

Fix non production cost 40000 40000

Net profit 117000 81000

FIGURE 2.5

Activity base budgeting
Activity Based Costing (ABC) is a method for developing cost estimates in which the project is
subdivided into quantifiable activities or a work unit the activity must be definable where
productivity can be measured in units (CIMA MANAGEMENT ACCOUNTING AND

Example

A company manufactures two products, L and M using the same equipment and similar
processes an extract of the production data for these products in one period is shown below

L M

Quantity produced (units) 5000 7000

Machine hours per unit 1 2

17


Set up in the period 10 40

Orders handled in the period 15 60

Overhead cost

Relating to machine activity 220000

Relating to production run set ups 20000

Relating to handling of orders 45000

Total amount 285000

Required an activity based costing approach using suitable cost drivers to trade overheads to
products

Activity Cost pool Cost driver Cost per driver

Machine 220000 22000 10

Product run set up 20000 50 400

Handling of orders 45000 75 600

FIGURE 2.6

Overheads L per unit M per unit

Machine 30 10

Product run set up .8 2.3

Handling of orders 1.8 1

FIGURE 2.7

18


1.4 calculate the breakeven point in value & units for BCC
(PVT) Ltd

Breakeven point in value = fixed cost/pv ratio

= 75000/.26

=288461.53

Working

PV ratio = contribution per unit/selling price per unit

=13/50

=.26

Breakeven point in unit = fixed cost/contribution per unit

=75000/13

=5769 units

1.5 if firms selling capacity is 25000 units what would be the
profit or loss of BCC (PVT) Ltd

Unit to be sold = (fixed cost + target profit)/contribution per unit

25000 = 75000+target profit/13

Target profit = 250000

19


1.6 what would be the number of units that BCC (PVT) Ltd
needed to produce in order to make sure $ 20000 profit
Unit to be sold = (fixed cost + target profit)/contribution per unit

x = (75000+20000)/13

Unit to be sold =7308 units

1.7 What is the stock recording method used by BCC (PVT)
Ltd?
The general principle is that inventory should be valued at cost there are three main methods in
which stocks are valued they are

 First in first out (FIFO)

 Last in last out (LIFO)

 AVECO

Here Bcc Company is using FIFO method because items received earlier those which are
issued first this is preferred method as per the accounting standard

For example

FIFO
Date Received Issued Balance
Details Price Quantity Total Price Quantity Total Price Quantity Total
Per Per Per
Unit Unit Unit
1-Jan 10.00 10 100 10.00 10 100
3-Jan 10.10 10 101 10.10 10 101
10-Jan 10.00 5 50

FIGURE 2.8

On January 1st BCC is purchasing 10 units at a cost of 10.00 per unit and on 3rd of January
they are purchasing 10 units at a cost of 10.10 per unit. On 10th of January they are issuing 5

20


units at a price of 10.00 per unit so here they are issuing the items which they have
purchased earlier if they issue the units at 10.10 prices per unit it will call as LIFO method

1.8 Show above details under other stock recording method
LIFO
This method assumes that issues should be price at the last purchase price this is not
accepted for financial accounting purpose.

LIFO
Per Per Per
Unit Unit Unit
1-Jan 10.00 10 100 10.00 10 100
3-Jan 10.10 10 101 10.10 10 101
10-Jan 10.10 5 50.5
10.00 10 100
10.10 5 50.5
15-Jan 10.20 10 102 10.20 10 102
17-Jan 10.20 10 102
10.10 5 50.5
10.00 2 20
10.00 8 80

FIGURE 2.9

AVECO
This method assumes that issues are price at weighted average this is calculated every time
there is a new receipt therefore every time a new order will issue aveco price is changed in
resulting in a representative price at all times. This valuation is also accepted for financial
accounting purpose

AVECO
Per Per Per
Unit Unit Unit
1-Jan 10.00 10 100 10.00 10 100
3-Jan 10.10 10 101 10.10 10 101

21


10.05 20 201
10-Jan 10.05 5 50.25
10.05 15 150.75
15-Jan 10.20 10 102 10.20 10 102
10.11 25 252.75
17-Jan 10.11 17 171.87
10.11 8 80.88

FIGURE 3

1.9 If the firms sell above issue at 20 per unit what would be
the profit or loss of BCC (PVT) Ltd under FIFO, LIFO, and
AVECO

Under FIFO profit calculation
Details amount amount
sale 440
Less-cost of sale
Opening inventory -
purchase 303
Closing inventory (81.6)
Cost of sale (221.4)
profit 218.6

FIGURE 3.1

Under LIFO profit calculation
sale 440
Less-cost of sale
Opening inventory -
purchase 303
Closing inventory (80)
Cost of sale (223)
profit 217

22


FIGURE 3.2

Under AVECO profit calculation
sale 440
Less-cost of sale
Opening inventory -
purchase 303
Closing inventory (80.88)
Cost of sale (222.12)
profit 217.88

FIGURE 3.3

It is a pattern that in times as rising prices the FIFO method will give the highest closing
stock value and highest profit in this scenario the LIFO method will give the lowest profit
value the aveco method will always be in the middle of the other two valuation method

1.10 prepare an income statement for BCC (PVT) Ltd based
on absorption costing approach

Absorption costing
Product X Y Z Total
Sales 135000 55000 105000 295000
variable cost 75000 40000 50000 165000
fixed cost 50000 25000 25000 100000
profit 10000 -10000 30000 30000

FIGURE 3.4

1.11 prepare an income statement for BCC (PVT) Ltd based
on marginal costing approach

23


Marginal costing
Product X Y Z Total
Sales 135000 55000 105000 295000
variable 75000 40000 50000 165000
cost
contribution 60000 15000 55000 135000
fixed cost 100000
profit 30000

FIGURE 3.5

1.12 Make recommendations and justify your
recommendations through calculations
Since the profit is showing 30000 under absorption costing and (10000) contribution for y
product we cannot make a decision right now to cancel the product or not therefore we need to
do marginal costing again without product

Marginal costing without product y
Product X Z Total
Sales 135000 105000 240000
variable 75000 50000 125000
cost
cont per 60000 55000 115000
unit
fixed cost 100000
profit 15000

FIGURE 3.6

Since the profit is decrease by 15000 in marginal costing we don’t need to cancel product
y

1.13 collect production details from a rival company that
produces three products analyze and present these data to
the management of BCC (PVT) Ltd
ABC (PVT) Ltd is a company which produces chair, table, and bed products and sells
them the information for the last five years sales are gathered now we will look at them

24


2004 2005 2006 2007 2008
chair 124000 132000 128000 107000 30000
table 134000 140000 141000 112000 48000
bed 124000 131000 124000 60000 40000

160000
140000
120000
100000 chair
80000 table
60000 bed
40000
20000
0
2004 2005 2006 2007 2008

FIGURE 3.7

The sales for the company have increased from the year of 2004 – 2006 this is due to the peace
talk I Srilanka many company launched their ducts in the Jaffna market this made the company
to sell more goods

But due to the war starts on at the end of the 2006 period the company sales decreased
dramatically on 2008

Since our army takes control of our whole country at the start of the 2009 the company is
expecting to sell more products because there are more companies itching to starts their
business at Jaffna

2.1prepare a routine cost report for magna moss (PVT) Ltd
based on above information and identify the cost per ton
$ $
Raw materials 33000
Productive wages 35000
Direct expenses 3000

25


PRIME COST 71000

FACTORY OVERHEADS
Unproductive wages 10500
Factory rent and taxes 2200
Factory lighting 1500
Factory heating 4400
Factory cleaning 500
Motive power haulage 3000
Directors fees 1000
Factory stationery 750
Factory insurance 1100
Depreciation(plant, 2000
machinery)
Loose tools written off 600
Water supply 1200
Rent ware house 300 29050

ADMINISTRATION COST
Sundry office expenses 200
expenses 800
Office stationery 900
Directors fee 2000

Rent, taxes 500

Insurance 500
Legal expenses 400
Depreciation cost (office) 1000 6300

DISTRIBUTION COST
Depreciation (delivery vehicle) 200
Bad debts 100
Sales departments- salaries 1500
Advertising 300
Up keeping delivery van 700
Commission on sales 1500
4350

FINANCE COST

Bank charges 50 50

TOTAL COST 110700

26


FIGURE 3.8

Cost per ton = total cost/no of units

=$110700/10000

=$11.07

• I made a assumption here I took the unproductive wages in factory overheads due to the
idle time

2.2 Evaluate the indicators of productivity, efficiency and
effectiveness of an organization like Magna Moss (PVT) Ltd
Productivity is the combination of the effectiveness and efficiency to get the understanding
about productivity firstly we need to understand what is effectiveness and efficiency

Economic efficiency and manufacturing effectiveness is very important for organization to
survive in this modern business world

In the case of improving competition Manufacturing Company likes Magna moss consider some
new ways to improve their value in production they can improve their productivity to reduce cost.
When we look this in a economic point of view when a product is produced economically
efficiently the cost of the production is low

You can see that each organization needs to balance efficiency against effectiveness and
where there is a conflict between efficiency and quality, the organization must decide what is
more important to them.

(BY: Mark Kelly
http://www.careermideast.com/en/Employer/Resources/Articles/Efficiency.aspx,cited on
14 of September)

The decision will often be determined by their organizational goals. Some organizations are
more willing to sacrifice quality for efficiency; some do the opposite. Organizations like 'The $2
Shop' obviously value efficiency over effectiveness. Customers save money.

(BY: Mark Kelly
http://www.careermideast.com/en/Employer/Resources/Articles/Efficiency.aspx,cited on
14 of September)

Effectiveness is defined as the degree to which the actual outputs of the system
corresponds to its desired or planned outputs
(http://www.authorsden.com/categories/article_top.asp?catid=5&id=31506)

27


Over the last years manufacturing companies worked to reduce the cost of their supplier this
facts leads the company to have operational efficiency. In typically organization they are using
40%-70% of the supply chain as a fixed this helps the organization to generate more When
company like magna moss wants to increase manufacturing effectiveness firstly they need to
consider the basic relationship between production process

Utilization performance

Returns customer
Production process
requirement

Physical input physical

FIGURE 3.9

effectiveness

From this we can clearly understand final production there are many factors that influence so
company needs to consider how many inputs are economic to insert for effective amount of
output

Efficiency is defined as the ratio of actual outputs to actual inputs after we choose to do the
right things, now we should do those things in the right way.
(http://www.authorsden.com/categories/article_top.asp?catid=5&id=31506)

An organization can be more efficient if it produces:

 The same outputs with fewer inputs

 More or better outputs for the same inputs

Efficiency is not about reducing costs if it compromises the quality or quantity of outputs.

When organization like Magna consider about manufacturing effectiveness they need to
understand about economic efficiency firstly.

28


There are two concept of efficiency

 Technological efficiency – this is possible when the output is not able to increase
without the increasing in input the formula for this is

Technological efficiency = Units of output/Units of input.

 Economic efficiency - this is possible when the cost of the output is low as possible
economic efficiency depends on the prices of factors of production we can calculate this
by

Economic efficiency = Value of Output
= (Price of output) X (Units of Output)/Value of Input (Price of input) X (Units of
Input)
(CIMA FUNDAMENTALS OF ECONOMICS LECTURER STUDY NOTES)

Something technologically efficient may not be always economically efficient but something that
economically efficient always technologically efficient the concept of economic efficiency is only
relevant when the quality of goods being produced unchanged

When company like Magna moss wants to work on their high production level they have to think
two different efficiency.

Statistic efficiency

 Economic efficiency

Improving efficiency will lead to

of outcome
output or quality
same level of
Inputs for the
of inputs
the same level
outcomes for
Improved
output for the
same level of
Increased

Improving
inputs

efficiency

FIGURE 4

29


Productivity, is measured by the ratio of what was produced to what was required to
produce it measured in physical units, or at constant prices . (CIMA FUNDAMENTALS OF
ECONOMICS LECTURER STUDY NOTES)

For example productive efficiency

Productivity can also be expressed as the change in output divided by the change in input

Output may be expressed in units or money terms depending on the situation

For example

V(Utt) = Q(Ut) X P(Ut)

Value equals quantity time price per unit. Where, V = value in monetary terms, Q = quantity in
physical terms, P = price per unit, U = Output, and t = the time period.
Input contains the use of labor, material and etc input may be expressed in units or money
terms depending on the situation

(By Willie Maartens

2009)http://www.authorsden.com/categories/article_top.asp?catid=5&id=31506, Cited 15th
of September)

Productivity can now be expressed as

V(Utt) / V(itt) = Q(Ut) / O(it) X P(Ut) / P(it), or Productivity = Efficiency x Price Recovery, for a
certain time period

Productivity is not production. Productivity does not refer to labor only labor is a part of the
production. Where production does not only mean manufacturing, but any process where a
product or service is produced. In general this measurement is used to indicate the relationship
between the output and the input of production this can be a labor, materials or capital. This
relationship is simpler to calculate than total productivity measures.

(By Willie Maartens

2009)http://www.authorsden.com/categories/article_top.asp?catid=5&id=31506, Cited 15th
of September)

The relationship between total output and individual input is used as a yardstick for productivity,
the result may be biased. Comparisons of inputs and sales also lead to false interpretation since
the selling price is sufficient enough to cover the cost

30


How to achieve a better results in company like Magna

Motivation

 Identify sources

 Reduce extrinsic

Satisfaction Productivity
+
 Find frustrations  Find distractions

 eliminate  eliminate

Better results

FIGURE 4.1

Productivity will lead to

 Achieving more output for the same input
 Achieving the same output from less input
 Achieving much more output for slightly more input
 Getting slightly less output for much less input
 Wile input decreases the output increases.

(http://www.accel-team.com/productivity/productivity_01_what.html)

2.3 Explain in detail the principle of quality & value for any
organization
Many firms attempt to add quality and value to their products or services in order to increase
sales and profitability. However, few appreciate the difference between value and quality. But by
doing so, they can more finitely increase their options for adding both value and quality

Quality

31


Quality is directly related to the product. A firm can increase a product’s quality, but that
increase may or may not be profitable. For example, Apple can increase the quality of its Mac
operating system but that may not lead to an increase in value for the users. (CIMA
2007)

Quality management refers to systematic policies, methods, and procedures used to ensure
that goods and services are produced with appropriate levels of quality to meet the needs of
customers. (CIMA MANAGEMENT ACCOUNTING AND PERFORMANCE EVALUATION

To achieve quality modern organizations are practicing five techniques they are

 New manufacturing technique

 Modern manufacturing operations technique

 Total quality management

 World class manufacturing

 Drum buffer and rope method/synchronous manufacturing

New manufacturing technique
In this section there are five elements need to be looked at

 Computer aided designing

Traditionally organization used brizill board to design the plan but now in modern organization
they are using a technique call computer aided designing here this technique will design the
planning. This technique also has the capabilities of identifying the resource requirement for that
planning. (CIMA MANAGEMENT ACCOUNTING AND PERFORMANCE EVALUATION

Computer aided manufacturing

Traditionally organization use labor centric to manufacture goods but under modern
manufacturing organizations are using machine centric to produce goods here the idea is
manufacturing goods using automated machine which are connected to a computer. (CIMA
2007)

Flexible manufacturing

Traditionally organizations have the capabilities of producing one type of products under one
department but now in modern department organizations have the capabilities of producing

32


more goods this is known as flexible manufacturing. (CIMA MANAGEMENT ACCOUNTING

Electronic data interchange

If organization uses email to contact with their supplier and customer it is known as EDI by
using email organization share the information easily with lower cost. (CIMA MANAGEMENT

 Enterprise resource planning system

Modern understanding is that to achieve total quality everyone in organizations need to work
together. If the organizations every department is connected through a computer network it is
known as ERP system (CIMA MANAGEMENT ACCOUNTING AND PERFORMANCE

Modern manufacturing operations technique
Under this method there are four techniques needs to be looked at

 Manufacturing resource planning 1 (MRP1)

Traditionally organization use passed information to plan the materials needed for the
production but in modern organization they are using computers to evaluate the materials
needed for the production here the user firstly input some information about materials such as
budgeted materials needed for a unit then this will calculate the resource required for the
production (CIMA MANAGEMENT ACCOUNTING AND PERFORMANCE EVALUATION

Manufacturing resource planning 2 (MRP2)

Later part MRP1 was developed and gets the capabilities of identifying the labors hours needed
for production and etc. (CIMA MANAGEMENT ACCOUNTING AND PERFORMANCE

Optimized production technique (OPT)

Opt have the capabilities of planning the resource requirement for the production and also have
the capabilities of identifying the bottlenecks and non bottlenecks then give the solution for this
bottlenecks. (CIMA MANAGEMENT ACCOUNTING AND PERFORMANCE EVALUATION

Total quality management

33


Getting the whole employees of the organization to work together in order to achieve quality
and customer satisfaction. (CIMA MANAGEMENT ACCOUNTING AND PERFORMANCE

Traditionally quality was the responsible of department call quality control but the modern idea is
to involve everyone in quality there by manage quality (quality management)

For traditional quality control organization, quality manage looks very attractive but to achieve
this there are some elements to be looked at

First in class in quality – under traditional quality control quality was the responsible of
department call quality control department where the employees are not concern about the
quality. But the modern concept is that to achieve TQM this trends need to be changed every
one in the organization should give their 100% commitment to achieve TQM. (CIMA
2007)

Continual improvement – traditionally once the organization set the standard and once it was
achieved it is seen as satisfactory but in quality manage the idea is quality is multidimensional to
achieve this continuous improvement needed(CIMA MANAGEMENT ACCOUNTING AND

Competitor’s benchmark – here the modern idea is that organization should keep on a eye on
competitors product quality and give better quality products than their competitors do. (CIMA
2007)

Employee empowerment and team approach – getting quality from employees from
supervision is seen as traditional quality control but the modern understanding is that
employees should be given their own decision making power and let them work as a team
which would help the organization to sustain in long term. (CIMA MANAGEMENT

Supplier quality – the quality of the output is depend on the input also therefore organization
need to select few supplier try to maintain long term relationship to keep the quality of the
product(CIMA MANAGEMENT ACCOUNTING AND PERFORMANCE EVALUATION OFFICIAL
STUDY TEXT 2007)

Modern manufacturing method
If the products reaches the customer with lower price, higher quality, and delivered within time
period to get customer satisfaction and performance it is known as modern manufacturing
method(CIMA MANAGEMENT ACCOUNTING AND PERFORMANCE EVALUATION OFFICIAL
STUDY TEXT 2007)

Drum buffer and rope method

34


CIMA defines that every activities which are carried out in organization is for the good will for
them but in reality drum buffer and rope system is more Before using the latest technology
organization firstly need to identify the bottleneck (drum) then they need to keep resource on
bottleneck to keep on producing (buffer) they also need to have good communication between
bottleneck and non bottlenecks to avoid unwanted inventory buildup. (CIMA MANAGEMENT

Six sigma is another way to achieve quality
Six Sigma is a smarter way to manage a business. This puts the customer first and uses facts
and data to drive better solutions.

Six Sigma efforts target three main areas

•Improving customer satisfaction

•Reducing cycle time

•Reducing defects

(Pete Pande and Larry Holpp

http://www.icc.edu/facultyStaff/sixsigma.asp, Cited on 25of September 2009)

With quality there are four main type of cost normally incurred

Prevention cost – cost amounts incurred regularly in training, recruiting people, up grading
machine, and cost incurred to maintain long term relationship with suppliers to prevent quality
problem are known as prevention cost (CIMA MANAGEMENT ACCOUNTING AND

Appraisal cost – cost incurred in checking quality such as salaries paid to QC department staff
and even equipment cost in checking quality are known as appraisal cost(CIMA
2007)

Internal failure cost – if products are identified as defective before being sold to the customers
cost amount now incurred to reproduced is known as internal failure cost(CIMA MANAGEMENT

External failure cost – if the customers identified the products to be defective replacement
cost, rework cost, loss of good will are all considered as external failure cost(CIMA
2007)

Value

35


Value is the worth of the package as a whole and the relationship to the quality of each part of
the package is tenuous.
(http://www.gurusoftware.com/gurunet/business/topics/Values.htm, Cited 6th of
November 2009)

For example, Apple increased the value of the Mac package by adding Internet Explorer.

These are the list of values that we can found among the companies

Continual improvement – the ability of the organization to improve them self so the
organization need to keep on working on improvement
November 2009)

Customer delight – the positive response that the customer feel from the organization products
and service The most successful businesses have discovered that goes beyond product and
service. Their business is providing delight to their customers by understanding their specific
personal interests, anticipating their needs, exceeding their expectations, and making every
moment and aspect of the relationship a pleasant if the customers are satisfied with the
organization products and service that is good for the organization but it is just the start these it
take more than to keep the same customer to come back again to the organization

November 2009)

A retailer in Raleigh, North Carolina understands the relationship between enjoyment and
achievement. Talking with him, we can see that he enjoys what he does. He attributes his
success to an incessant focus on the value of customer service. "Customers are our best
friends. They are always right. You have to try to exceed their expectations. It’s really fun to try."
Among other things, he sends fruit baskets to customers who buy big systems. Since he
founded his company in 1978, he has never had a down year. Sales were up 25% in 1995 and
another 34% in 1996. His profits are strong too.
November 2009)

From the information above we can clearly understand that if we make the customer delight we
can achieve the profit without further difficulties

1. developing the employees – if the employees of the organization are delighted
organization can achieve their target easily we can make them happy by providing
compensation and job recognition at the basic level organization can compensate with

36


better payment at the next level the organization can make a effort then develop the
physical and technical skill of the employee through formal training.

((http://www.gurusoftware.com/gurunet/business/topics/Values.htm, Cited 6th of
November 2009)

2. Maximum utilization – the organization need to find ways to use its resource utilized

Resource utilization = resource required/resource available

Organization can use a concept call theory of constraints to identify the bottleneck
resource and non bottle neck resource. When they identified this they can think about
which machine they need to allocate resource

November 2009)

3. Commitment to society - Their greatest growth occurs at moments when companies
align the development of these internal engines with the explosive emergence of new
forces in society. Companies that can attune their business strategies to reflect the
evolutionary changes of society in several or all of their growth engines.

November 2009)

37


Implementing, Institutionalizing Values
Values are only good when it is implemented to all parts of the organization If don’t implement
this value in all parts of the organization the value is useless. Value has the capabilities to
increase the revenue and profit of the company. To fully implement and thus institutionalize a
value in a company the following steps need to all occur.

November 2009)

Selection – choose the value that will suit the company and implement it to all parts of the
organization.

Commitment – to implement the value to the whole part of the organization commitment is
needed from the whole employees working in the organization

Standards -- A set of standards for each activity in the company needs to be implemented for
each value.

Structure – the company should have the right structure to implement value

Jobs activities and systems – the company should have clearly defined job positions, job
activities, and systems the value should corporate with this to achieve the target

Employee responsibility -- the responsibility of the each employee to implement value should
be clearly defined

Skills – every one should have skills to work with the value

November 2009)

The ultimate power of values is the ability to express it in every detail and act that the company
performs.

38


2.4 Identify and asses potential improvements for Magna
Moss (PVT) Ltd
Magna ltd is a manufacturing company and its cost sheet has been prepared the total cost is
110700 form this cost sheet. In this cost sheet raw material, productive wages, and
unproductive wages showing high amount. To understand the reason for this amount proper
investigation needs to be carried out based on the investigation which was carried out me firstly
I would like to give the problem

1. Magna company have recruited new employees for their manufacturing department the
new employee took more time to produce goods. To get the work done quickly the
organization hire skilled employees for the production and paid more for the skilled
employees

Total productive wages=35000/110700 is 32% percentage of the total cost

2. Newly recruited employee uses more raw materials to produce goods this is due to they
don’t have productivity, efficiency and effectiveness

3. The company doesn’t have a good relationship with their supplier this leads to a high
cost of raw material

4. The unproductive wages is also showing high amount

Based on the problem which I have found in the above organization now it’s time to introduce
new concept to their manufacturing to improve their performance there are some tools to be
looked at when talking about quality now we will look at them

Can Practice Total quality management
Getting the whole employees of the organization to work together in order to achieve quality
and customer satisfaction

Traditionally quality was the responsible of department call quality control but the modern idea is
to involve everyone in quality there by manage quality (quality management)

For traditional quality control organization, quality manage looks very attractive but to achieve
this there are some elements to be looked at

First in class in quality – under traditional quality control quality was the responsible of
department call quality control department where the employees are not concern about the
quality. But the modern concept is that to achieve TQM this trends need to be changed every
one in the organization should give their 100% commitment to achieve TQM. (CIMA
2007)

39


Continual improvement – traditionally once the organization set the standard and once it was
achieved it is seen as satisfactory but in quality manage the idea is quality is multidimensional to
achieve this continuous improvement needed. .(CIMA MANAGEMENT ACCOUNTING AND

Competitor’s benchmark – here the modern idea is that organization should keep on a eye on
competitors product quality and give better quality products than their competitors do. (CIMA
2007)

Employee empowerment and team approach – getting quality from employees from
supervision is seen as traditional quality control but the modern understanding is that
employees should be given their own decision making power and let them work as a team
which would help the organization to sustain in long term. (CIMA MANAGEMENT

Supplier quality – the quality of the output is depend on the input also therefore organization
need to select few supplier try to maintain long term relationship to keep the quality of the
product. Since the raw material is showing high figure this could be due to organization
doesn’t have the good relationship with their supplier so organization need to select best
supplier for them and tries to develop good relationship with them by doing like this they
can get the raw material as they want with same price

Can use Poka yoke (mistake proofing) concept
This is an approach for mistake proofing processes using automatic devices or methods to
avoid simple human errorControl upstream, close to the source of problem by for example
incorporating monitoring devices to warn on defects in materials or abnormalities within the
process.

(www.doms.iitm.ac.in/documents/rahul/.../Process-Management.ppt, Cited on 10of
November 2009)

Establish control mechanisms to deal with different problems to enable operators to know which
problem to cure and how to cure it with minimal disruption to the operating system

Take a step-by-step approach by taking small strides, simplifying control systems and having
economic viability in mind. Efficiency, technological sophistication, available skills, work
methods have all got to be carefully studied for effective use of Poka-Yoke.
November 2009)

40


Poka-Yoke encourages inter-departmental co-operation and is main vehicle for continuous
improvement because it encourages continuous problem-solving activity

November 2009)

Can Use the seven QC tools

 Run charts and control chart – a run chart is a line graph with data plotted over time
For example

FIGURE 4.2

Source www.cob.sjsu.edu/gilliss_d/Spring09/.../OM_Chapter_15.ppt

 Flow charts – process mapping to identify the sequence of activities or flow of materials

 For example

41


FIGURE 4.3

Source http://www.mayerton.com/fileadmin/templates/upload/services/flow.JPG

 Check sheets – simple tools for data collection ensure completeness

For example

FIGURE 4.4


42


 Histograms - graphically represent frequency of values within a specified group

For example

90
80
70
60
50 East
40 West
30 North
20
10
0
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr

FIGURE 4.5

 Scatter diagrams – graphical component of regression analysis

For example

Y-Values
3.5
3
2.5
2
1.5 Y-Values
1
0.5
0
0 0.5 1 1.5 2 2.5 3

FIGURE 4.6

 Cause and effect diagram – represent chain of relationship often called a fishbone
diagram

For example

43


FIGURE 4.7


 Pareto diagrams – separate the vital few from the trivial many causes provide direction
for selecting projects for improvements

For example

44



FIGURE 4.8

Can use Kaizen concept
Kaizen means continuous improvement involving everyone which broadly includes top
management, managers and workers The basic philosophy of kaizen is to improving things a
little bit a time, all the time which has the highest probability of success innovations can start

45


simple and employees can built on their success in this unending process. (CIMA
2007)

Commonly used tools in kaizen

 PDCA – a cycle that encourages the key stages to continuous improvement namely
plan-do-check-act

 The flash bone diagram - here a line is drawn indicating a route to continuous
improvement and off this line fish bone will appear indicating problem that may be
encountered

 The pareto rule – Italian economist vilfredo pareto identified that 80% of the country’s
wealth was held by 20% of the population

 The five why process – first developed at Toyota it encourages employee to examine
questions by constantly asking why until the real issue is identified

STUDY TEXT 2007)

Conclusion
Convert to Machine centric and use the concept TQM is the good way to improve the
Magna moss performance

Since the wages showing high amount 35000 they can introduce machine centric instead of
labor centric this means instead of heavily using labor hours they can use more machine hours

In this section there are four elements they can implement

Computer aided designing

Magna can use a technique call computer aided designing here this technique will design the
planning. This technique also has the capabilities of identifying the resource requirement for that
planning

Computer aided manufacturing

Magna can use machine centric to produce goods here the idea is manufacturing goods using
automated machine which are connected to a computer

Electronic data interchange

If organization uses email to contact with their supplier and customer it is known as EDI by
using email organization share the information easily with lower cost

Enterprise resource planning system

46


Modern understanding is that to achieve total quality everyone in organizations needs to work
together. If the organizations every department is connected through a computer network it is
known as ERP system

If they implement these concepts they can achieve number of benefits

1. Calculability – with lesser employee and more machine the organization are now in
position to identify what goes in to the production unit this calculability is now seen as a
benefits

2. Control – with calculability organization are now in a position to identify what actually
goes in to the production unit so they can keep their actual within the standard

3. Efficiency – efficiency means getting the customers rapidly here by using machine
centric organization can reduce the cost for wages and they can produce quality goods
with lesser time all these benefits leads to cost saving since the cost is reduced for the
production organization can think about producing more goods and sell them with lesser
price than their competitors do this will attract more and more customers. This method
will help the organization to earn more profit so the organization can invest these money
in other investments here the company is going to attract more customer because of the
quality and price of the products

4. Predictability – calculability control and efficiency makes service delivered by the
organization as expected which attracts more customers

If the Magna Ltd implements the concept which I have given above they can improve the quality
of product reduce the total cost and can save lot of time in producing one good

By reducing the cost they can save money so they can think about new investing or they can
also think about producing more goods because they can earn more money for example
(assumption are made)

Currently their production cost is 11.07 per unit think they are adding 36% profit to the cost so
their selling price is 15 per unit, there are more than ten competitors in this market they are able
to sell the goods for 14.8 due to the price of market and lack of quality in Magna goods they only
able to sell 6000 units so

Total sale = 6000*15 = 90000

Total cost for this = 6000*11.07=66420

Total profit = 23580

After implementing machine, total quality management they can reduce their cost for one unit
to 7

47


So if they produce more goods and apply their usual profit margin 3.93 per unit their selling
price will be 10.93 this price is 3.87 less than the competitors do and the quality of the goods
which was produced by Magna Moss definitely going to increase due to the concept like Modern
manufacturing and total quality management,

Due to this customers are going to be attracted by our selling price and our quality of goods so
if Magna produce more goods (using machine centric) and sell at this price they can earn more
profit other than profit to run a business brand name of the company is very important they can
also get good brand name as days go (if they keep work on this)

After getting brand name and repeated customer they can think about selling the 30%
ownership of the company using that money they can look for other business opportunities
because there are some good investment opportunities available in North east the government
of Srilanka also providing more fund to invest there

But to implement these concepts the management of Magna is need to invest large
amount of money but if they invest the money they can improve their quality of products

3.1 explain in detail the purpose and the nature of the
budgeting process for an organization like Ramona (PVT) Ltd

What is budgeting?
Budgeting is a quantified plan or action relating to a specific future period. A budget will act as a
defined target for planning purposes as well as yard stick for control purposes. (CIMA
2007)

Budget committee

The budgeting process requires a high degree of coordination between the various functions of
the company. (CIMA MANAGEMENT ACCOUNTING AND PERFORMANCE EVALUATION

Now we will look at the multiple functions of budgeting which also known as benefits of
budgeting

Planning
Predetermine estimate for future period is only possible if planning is undertaken for future in
most situation budgetary preparation is start with sales budget the key reason for this is for most
organization key limiting factor is sales demand(CIMA MANAGEMENT ACCOUNTING AND

48


Controlling
After the figures are planned next part is keeping the actual within the budget this is known as
budgetary control there are two methods in this

 Feed back control

 Feed forward control

STUDY TEXT 2007)

Feed back control

Here compare the actual figures with budgeted figure at the end of the period if variances
identified necessary action will be taken since the year is already finished organization is
reacting to what had happen but in reality feedback control is more here to compare actual with
budget there will be more information gathered this is known as feed loop control. Firstly actual
information will be gathered for this organization is seen as a system. (CIMA MANAGEMENT

Budget

Analysis

Comparator

Effectors

Sensor

Decisions

Input Process actual information

FIGURE 4.9

49


Here firstly actual information is gathered is known as sensor then this actual is well compared
with budget information known as comparator then this compared information will be given to
managers to make decision known as effectors

Feed forward control

Here the budget figures will be compared with the forecasted actual figures at the beginning of
the period (CIMA MANAGEMENT ACCOUNTING AND PERFORMANCE EVALUATION

Communicating and coordination
To prepare the budget relevant parties need to communicate with others once it was prepared it
need to be communicated to relevant managers. (CIMA MANAGEMENT ACCOUNTING AND

Motivation
Once the budget is prepared with figures known and it is communicated to others reward
waiting employees will get motivated and work for the target. (CIMA MANAGEMENT

Performance evaluation
Out of the five functions of budgeting performance evaluation is evaluating the performance by
comparing budget and actual figures there are three methods normally use evaluate
performance

 Financial ratios

 Balance scorecard

 Bench marking

.(CIMA MANAGEMENT ACCOUNTING AND PERFORMANCE EVALUATION OFFICIAL
STUDY TEXT 2005

Financial ratios

By comparing budgeted ratios and actual ratios evaluating the performance will be done here.

For example gross profit margin

.(CIMA MANAGEMENT ACCOUNTING AND PERFORMANCE EVALUATION OFFICIAL
STUDY TEXT 2005

Balance scorecard

50


In balance scorecard the financial and non financial performance will be compared

For example financial perspective, customer perspective and innovation perspective

STUDY TEXT 2007)

Benchmarking

Here the idea is organization need to identify best practice organization in eternal and they need
to come with some agreement to share certain information we can divide this in to two type one
is internal benchmarking and external benchmarking. (CIMA MANAGEMENT ACCOUNTING

In budgeting planning controlling and performance evaluation is mostly talked but when
applying budgeting in to real environment there are some issues arises now we will look
at them

In an uncertain environment –unlike in past the environment we are living is rapidly
changing creating two problems. (CIMA MANAGEMENT ACCOUNTING AND PERFORMANCE

With Drastic movement analyzing the past is not a useful one

 Anyhow company prepared budget with lot of uncertainty keep the actual
within budget is not possible

This two issues in modern environment tries to show us budgeting is not possible one but
budgeting serves a lot for organization so this is very important in an uncertain environment two
possible option available in budget preparation. (CIMA MANAGEMENT ACCOUNTING AND

 Three tier approach

 What if analysis

Three tier approach

Although the movement in past information is drastic the very fact that past information make
very convenient to analyze it through computer base system but the problem here is rapid
changes in environment for this three tier approach suggest that organization should prepare
three budgets to suits the most realistic one so organization will look past information then look
in to future based on that budgets will be prepared from this organization need to select the bes

51


and worst one(CIMA MANAGEMENT ACCOUNTING AND PERFORMANCE EVALUATION

What if analysis

There are lot of criticisms about three tier approach because preparing three budgets while
preparing budget lot of resources are used and too many budget also tries to confuse who are
using it so it is suggested here organization need to prepare best budget and look at the budget
figures taken asking what if question on original figures taken. (CIMA MANAGEMENT

For nonprofit making organization – budgets are prepared manly based on sales
demands, material purchased, labor rate and with main motive of earning profit but when
preparing budgets for nonprofit making main aspect in budget is changing for example sale
demand will change as no of service provided ,material is mostly donated, labor is volunteered
and the most fact is not for profit so these information are confusing us when preparing budgets
for nonprofit organization they need to prepare budget call program planning budget(CIMA
2007)

Beyond budgeting – beyond budgeting is a budgeting movement which argues that
traditional budgeting is a problem. There are two problem mainly arises with beyond budgeting
they are. (CIMA MANAGEMENT ACCOUNTING AND PERFORMANCE EVALUATION

1. When the organization set the budget for longer period they
hardly changes the set budget even though the movements in
the environment is changing rapidly

2. Budgets normally prepared by the top level people then imposed
upon the lower level people dissatisfied with this

STUDY TEXT 2007)

So in order to overcome this problem it is now suggested

 Budgets should be prepared in such way that if any changes in environment
budgets is also need to be changed

 The budget should be prepare by the budget holder which will lead to better
budget prepared

52


STUDY TEXT 2007)

3.2 assess different budgeting method and its need for
Ramona (PVT) Ltd
There are two main approaches to budgeting they are

• Participative budgeting (bottom up budgeting)
This is a budgeting system in which all budget holders are given the opportunity to participate in
setting their budget this is also known as bottom up budgeting. This method is very effective
with large decentralize organization in which size of the organization is such that top level
cannot prepare budget for all the different areas the organization is involved in. (CIMA
2007)

The advantages of the method are as follows

Improve quality of forecast – managers who are doing a job on a day to day basis will have
the best knowledge of what is achievable of the period(CIMA MANAGEMENT ACCOUNTING

Improve motivation – budget holders are more likely to work towards a budget they have set
for themselves rather than one that has been forced on them(CIMA MANAGEMENT

• Imposed budgeting (top down approach)
Here the top management prepares the budget with little or no input from operating personnel.
This method is suitable for new small and even company facing difficulties this is because such
organization to grow and prosper top level needs to take initiatives (CIMA MANAGEMENT

53


Alternatives approach to budgeting

• Traditional budgeting (incremental budgeting)
The budget is preparing by considering the expenses during the last accounting period and
adding an allowance for anticipated inflation this method is unlikely to result in an optimum
allocation of resources this is because there is no justification for the inclusion of each item in
the budget because current year results normally include the current budget and the current
actual performance and the next period budget is based on this information where current
problem likely to travel forward. (CIMA MANAGEMENT ACCOUNTING AND PERFORMANCE

Practical example

X Ltd is a manufacturing company. Transport costs for last year amounted to £100,000.
Planned expansion is expected to result in £10,000 additional transport costs (estimated at
current prices). Inflation is expected to be 5%.

The transport budget for the next year could be based on:

£100,000 + £10,000 = £110,000 to allow for expansion,

Then £110,000 x 105% = £115500to allow for inflation.

• Zero based budgeting (ZBB)
Zero based budgeting can be defined as a budgeting method where each cost element needs to
be specifically justify without accrual the budget allowance is zero and each activity is
considered as if it was under taken for the 1st time resources are likely to allocated where they
can be use most effectively. (CIMA MANAGEMENT ACCOUNTING AND PERFORMANCE

There are three steps need to be followed in ZBB they are

a description of each organizational activities in a decision packaging – with no previous
budget been looked at organization need to now identify different options available for the
activity been looked at(CIMA MANAGEMENT ACCOUNTING AND PERFORMANCE

the packages are then evaluated and ranked in the order of priority – all the option identified
now needs to be evaluated by forecasting their cost and benefit and through a cost benefit
comparison the best option need to be selected(CIMA MANAGEMENT ACCOUNTING AND

54


The resources are allocated accordingly – once the best option is identified the cost amount
needs to be allocated to that option and the budget prepared accordingly(CIMA MANAGEMENT

• Rolling budget
A budget continuously updated by adding further accounting period when earliest period has
expired. In an uncertain environment planning for 12 months straight away is likely to be a
problem so there are some organization who keep on adding their existing budget and when
such addition are made if needed the existing period are revised this method of budgeting
allows the organization to maintain a budget for a sizable fix period (CIMA MANAGEMENT

Suitable budgeting method for Ramona (PVT) Ltd
When talking about suitable budgeting method for this organization I would like to recommend
rolling budget. rolling budget is about quantifiable plan in action where when the earliest period
is lapses an equal period is added from future maintaining a fix budget continuously there are
number of advantages Ramona can get

In modern environment uncertainty is very high making it difficult to plan for a 12 month future
period all of a sudden difficult where it is much more convenient to do small addition

Traditionally when the existing budget is rolled if required organization can revise the existing
budget period making the budget more realistic

But there are some disadvantages with this method one is frequent addition to the existing
budget and the revision made is likely to take out the seriousness towards budget setting the
second one is the addition and revision made by what amount and who is responsible is also
likely to create conflicts

But in an uncertain environment this rolling budget will suit this company

3.3 prepare relevant budgets in order to draw up a master
budget for Ramona (PVT) ltd

Sales budget

55


details January February march
Sales units 5000 4000 6000
Sales price 35 35 35
Sales value 175000 140000 210000
FIGURE 5

Production budget

Sales unit 5000 4000 6000
Opening stock (fg) (1000) (800) (1200)
Closing stock (fg) 800 1200 1000
Production unit 4800 4400 5800
FIGURE 5.1

Material usage budget

Production unit 4800 4400 5800
Per unit requirements 4 4 4
Total requirements 19200 17600 23200
Rate per unit of 2.5 2.5 2.5
material
Total cost 48000 44000 58000
FIGURE 5.2

Material purchase budget

Production 19200 17600 23200
requirements
Opening stock (rm) (4800) (3520) (4640)
Closing stock (rm) 3520 4640 4000
Total purchase 17920 18720 22560
Rate per material 2.5 2.5 2.5
Total cost 44800 46800 56400
FIGURE 5.3

Labor budget

Production units 4800 4400 5800
Labor hours per unit .75 .75 .75
Total requirements 3600 3300 4350
Rate per hours 8.5 8.5 8.5
Total costs 30600 28050 36975

56


FIGURE 5.4

Variable overhead budget

Direct labor hours 3600 3300 4350
needed
Rate per hours 8 8 8
Total cost 28800 26400 34800
FIGURE 5.5

Production costs budget

Material usage budget 48000 44000 58000
Labor budget 30600 28050 36975
Variable overhead 28800 26400 34800
budget
Fixed overhead 3000 3000 3000
budget
Total cost 110400 101450 132775
FIGURE 5.6

Cash budget

details January February March
Cash receipts
December sale 2000
January sale 140000 35000
February sale 112000 28000
March sale 168000
Total cash received 142000 147000 196000

December Payable paid 15000
Administration cost 9400 9400 9400
Dividend paid 8000
Direct material January 35840 8960
Direct material February 37440 9360
Direct material march 45120
Variable cost 28800 26400 34800
Fix cost 3000 3000 3000
Labor cost 30600 28050 36975
Income tax 33900
Net cash 19360 33750 15445
Opening cash balance 20000 39360 73110
Closing balance 39360 73110 88555

FIGURE 5.7

57


Tax calculation

Details January February March Total

Total net 58400 26350 69425 154175
income

tax 12848 5797 15274 33918.5

FIGURE 5.8

3.4 prepare a cash budget for the first three months for
Ramona (PVT) Ltd
Cash budget

details January February March
Cash receipts
December sale 2000
January sale 140000 35000
February sale 112000 28000
March sale 168000
Total cash received 142000 147000 196000

December Payable paid 15000
Administration cost 9400 9400 9400
Dividend paid 8000
Direct material January 35840 8960
Direct material February 37440 9360
Direct material march 45120
Variable cost 28800 26400 34800
Fix cost 3000 3000 3000
Labor cost 30600 28050 36975
Income tax 33900
Net cash 19360 33750 15445
Opening cash balance 20000 39360 73110
Closing balance 39360 73110 88555
FIGURE 5.9

Tax calculation

58

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