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Assignment on costing and budgeting
Page 1 of 23
YousufHasan Id no:6650
Introduction:
Ford motor company one of the top manufacturing company in UK. It was established
in 1993 and employed 5929 people. Ford is now most popular car maker in UK. Over
100 years they are leading UK market by creating innovative products and more
efficient and attainable for people.
Answer outcome (1.1)
Cost represented the estimated dollar value of resources consumed by the
organization in providing a product or service; they are critical element of many
business decisions. Detailed cost information provides a company with useful data
on its resource spending and how each product and service contributes to
profitability.
According to William Baumol, 1968 ³costs are the monetary value of expenditures for
supplies, services, labour, products, equipment and other items purchased for use
by a business or other accounting entity´
In other way cost is anything incurred during the production of the good or service to
get the output into the hands of the customer.The customer could be the public (the
final consumer) or another business.Controlling costs is essential to business
success.
Classification of cost:
Figure 1.1: Classification of cost
cost
Elements
Nature
FunctionRelevance
Controllability
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Assignment on costing and budgeting
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YousufHasan Id no:6650
Elements of cost: Row materials are converted into product by the help of
manufacturing concern, such as labour, plants. The elements which are contribute
the cost of manufacturing known as elements of cost. The elements of cost are
follows:
Particular process, job operation or product has a relationship with direct material,
direct labour and direct expense but there is no relationship with indirect material,
indirect labour and indirect expenses.
Factory cost= Prime cost + factory overhead
Cost of production= factory cost + administration overhead
Total cost of sales = cost of production + selling and distribution overhead
Material Labour Expenses
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Assignment on costing and budgeting
Page 3 of 23
YousufHasan Id no:6650
Nature of cost:
Function of cost:
Fixed cost
� Costs remain fixed over arange of output levels,e.g. rent and rates
Semi fixed
� Costs which combine afixed and variableelement, e.g. telephone
bill with fixed monthly or quarterly rental andcharge per unit
Variable
� Costs vary directly withoutput, e.g. directmaterials and directlabour
� Every year ford motor company spend hugeamount of money in
production to createinnovative andattainable products for
people.
Production
�After produce the productford company needs tomake sure product reach tocustomer and that¶s costmoney.
Selling anddistribution
�To make the operationsuccessful Ford motor company has to spendmoney for administration
Administration
Financ
d
partm
nt¡
f
f ¡
rd m¡
t¡
r c¡
mpany
n
d¢
t¡
d
cid
h¡
w
much m¡ n
y th
y will
¢ p
nd pr¡
ducti¡
n,
¢
lling and di¢ tributi
¡ n,
R&D
tc.
Finance
�Ford £ o¤
or co£ pany needs¥
o do R&D¥
o crea¥
e ¦ ore§
nnova¥
§
ve produc¥
and¥
oadop
¥
new¥
echno ̈
ogy.
R esearch anddevelopment
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Assignment on costing and budgeting
Page 7 of 23
YousufHasan Id no:6650
Answer outcome (1.3)
Figure 1. : Costing techniques
Absorption costing
Absorption costing means that all of the manufacturing costs are absorbed by the
units produced. In other words, the cost of a finished unit in inventory will include
direct materials, direct labour, and both variable and fix ed manuf actur i ng overhead.
As a result, absorption costing is also referred to as full costing or the full absorption
method.
Marginal costing
µThe accounting system in which variable costs are charged to cost units and thefixed costs of the period are written off in full against the aggregate contribution. Itsspecial value is in decision making¶. (Terminology.)
The term µcontribution¶ mentioned in the formal definition is the term given to thedifference between Sales and arginal cost. Thus
ARGINA COST = VARIAB E COST DIRECT ABOUR+DIRECT ATERIA+DIRECT EXPENSE+VARIAB E OVERHEADS
CONTRIBUTION SA ES ARGINA COST (globusz.com, 2010)
Costing
Techniques
Absorption
costing/ full costing
arginal
costing
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Assignment on costing and budgeting
Page 8 of 23
YousufHasan Id no:6650
Absorption Costing
Ford motor company now want to calculate how much money they spend to produce
tire
Full Capacity of Ford Company , units
Current production production is , units
Var iable cost per units tire £
otal fixed cost rent, electr icity, as) £ ,
Selling pr ice would be fixed £ per units
Sales Revenue , units50£50,0000
Less) total var iable cost ,000 units 0 £ 0,000)
Less) total fixed cost £ 58,000)
Pr of it 42,2000
Unit cost otal cost
umber of units
£ 0,000+£58,000
0,000 units
£7.8per unit
8 per unit
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Assignment on costing and budgeting
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YousufHasan Id no:6650
Answer outcome(1.4
Ford motor company uses both uantitative and ulitative data to get the inf ormation,
masure their success and plan f or f uture.
Quantitative data: Quantitative data is type of data that counted numar ically and
measured and expressed in uantit y. Its help to now the trends and changes over time. Quantitative data can be manipulated and satistically analyzed , it can be
shown in graphs, tables and histographs.
able .
Qualitative Data: Qualitative methods use to descr ibe the inf ormation rather than
showing statistical inf erences. his method provides more depth and r ich
descr iption.
able .
Qualitative and uantitative data can be presented in diagrammatical, graphical,
index number .
iagrammatical or raphical presentation: hereare some benefits of
iagrammatical or raphical presentation. hey are f ollows:
y elp to understand the situation uickly , explained and compared data in
presentation.
y ranslate the ideas eff ectively and uickly
y More eff ective than table but may be less accurate.
y able and diagram suitable f or descr iptive data but graph is suitable f or
continuous data.
he buyers of Ford cars in table . can be shown in graph:
Frequency distr ibution of 00 Ford car buyers
Age Frequency
8- 8 0
8- 8 5
8-48 0
48-58 5
Frequency distr ibution of 80 Ford car buyers
User Frequency
Official 40
personal 5
Public 0
ospital 5
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Assignment on costing and budgeting
Page 10 of 23
YousufHasan Id no:6650
Figure 1.3: Ford car buyer
Index number: Index number measures the economic changes over time.Because
the©
work in a similar wa©
to percentages the©
make such changes easier to
compare. Briefl©
, this works in the following wa©
:
Suppose Ford car TDCi163 costs £19 thousands in 2009 and in2011 its cost £21,
corresponding to 100% .
The index number can be calculated for period of 2009 as a proportion change
follows:
The index number 21 100 110.53
100 19
0
10
20
30
40
Frequency
Car buyer
18-28
28-38
38-48
38-49
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Assignment on costing and budgeting
Page 12 of 23
YousufHasan Id no:6650
Whole year they will buy tire, window regs and body panel, they will also recruit and
pay new employees. If Ford find chipper supplier with discount they may change the
supplier . hese diff erences will lead to var iations between actual cost and standard
costs budgeted as f ollows:
Mater ials Q uantity X Price = Standard Cost
ire 4 tires X £15 £ 0
Body panel 1body panel X £ 5 £ 5
Window Regs 1window regs X £5 £5
Mater ial¶s total cost £90
irect labour cost 8 hours X £11 £88
otal direct cost £178
he analysis of mater ial var iance would be:
Mater ials Q uantity X Price = Standard Cost
window regs Budget window regs X £5 £10
Actual 1window regs X £5 £5
Mater ial var iance £5 f avourable
Pr ice var iance £ 0-£ 5) X 1 Body panel £5 Unf avourable
Variance in quantity .00-1.00) X £5 £5 f avourable
Mater ial var iance o var iance
The analysis of variance in direct labour would be the following:
Mater ials Q uantity X Price = Standard Cost
irect labour Budget 10 hours X £10 £100
Actual 8 hours X £11 £88
DL Variance £12 f avourable
Pr ice var iance £10-£11) X 8 hours £8 Unf avourable
Variance in quantity 10-8) X £11 £22 f avourable
DL Variance £14 f avourable
Responsibility centre: Responsibility centre is an organization unit or
aamanager is held accountable. Responsibility accounting enables accountability f or
financial results and outcomes to be allocated to individuals throughout the
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Assignment on costing and budgeting
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YousufHasan Id no:6650
organization. he ob jective is to measure the result of each responsibility centre. It
involves accumulating costs and revenues f or each responsibility centre so that
deviation f rom per f ormance target typically the budget) can be attr ibuted to the
individual who is accountable f or the responsibility centre.
Answer outcome (2. )
Cost reduction methods:
* Cost reduction methods that helps to enhance value and quality
* elp to make buying decision
* Buy the components and inputs f rom external suppliers if it is cheaper than making
* Purchase in bulk to qu alif y f or bulk purchase discount Cash purchase
* Pay on time or ear ly to qualif y f or ear ly payment discounts
* Maximize use of f ull capacity to reduce fixed cost per unit
* Introduce quality control to reduce wastage and warranty claims
* Use high skilled workers to reduce wastage and increase output per labour hour
* Use of state-of-ar t technology or machinery in cer tain cases produce f ast and in
many cases cheaper
* rained employees work f aster and reduce wastage with better quality and finishing
* Change of costing method/system example use of marginal costing will reduce cost
per unit theoretically
* Closing down loss making divisions ± caref ul when you make such a statement
* his is also known as key f actor analysis. his analysis to allocate scarce resources
to minimize the cost and maximize profit
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Assignment on costing and budgeting
Page 14 of 23
YousufHasan Id no:6650
Answer outcome (3.1)
Budget:
A budget is the financial bluepr int or action plan f or a depar tment or organization. It
translates strategic plans into measurable expenditure and anticipated returns f or a
cer tain per iod of time.
According to J.J. ampton cited by isar Ahmed, 2004:220) A budget is f ormal
plan expressed by dollars´
So a budget is not an ornamental yellow bird f rom tropical climes. It is a plan, a course through the f uture. ormally a budget descr ibes a per iod in the f uture not the past.
THE PURPOSE O A BUDGET Budgets can accomplish the f ollowing:
Forecasting Inevitably, if an organisation is going to draft a budget which will be of any use whatsoever , it will have to make f orecasts. hese f orecasts will notalways be correct, but at least the organisation has had to look ahead. Itwon¶t see every danger or oppor tunity, but looking ahead must be better than moving f orward with eyes closed.
Planning Once f orecasts are completed, planning can be carr ied out. For example, if the f orecast suggests a dramatic increase in demand, then new production f acilities might have to be planned. owever , it is impor tant to be aware atthe planning stage that the f orecasts might not be correct, or even if they were correct at the time they were made, things can change. etailed
planning might even require the f orecasting stage to be revisited to check estimates or to try to gather more evidence f or estimates.
Coor dination In many ways, coordination is an aspect of planning making sure the company delivers what it has budgeted to sell), but it is wor thy of a separate mention. Coordination really highlights is that there has to be a match between the organisation¶s structure and ambition and the requirements f or its success. In some businesses it is impor tant to meetwell-understood customer demands quickly and reliably, and in this context, str ict budget targets and measurement can be vital to success.
Communication
A budget is a succinct and precise way of communicating targets to depar tments and employees ± or at least some aspects of what should be achieved. he problem is not what is specified in the budget, it¶s what¶s notspecified. he budget might state explicitly that 2,000 units should be made in a per iod, but implicit in the target is that the units should be of a ce r tain quality. he budget might be explicit about the labour rate per hour to be paid, but might not specif y the skills that employees should have.
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Assignment on costing and budgeting
Page 16 of 23
YousufHasan Id no:6650
Receipts and payment method: This is most popular and widely used method to
prepare cash budget. The estimation under this method can be given monthly,
f or tnightly or weekly basis. This method is suitable f or the business where sales are
unstable, seasonal or suff er f rom the shor tage of liquid resources.
Adjusted Earnings Method:The estimation under this method can be considered at
least 5 years. Earning ad justed f or non -recruiting or extraordinary products. The
ad justed earnings can be averaged or can use prevailing rate of return f or
comparable companies or an appropr iate discount rate.
Balance Sheet Method:The balance sheet methods estimate the financial condition
end of the budget per iod .Based onactual data it¶s similar to balance sheet. For this
reason company balance sheet is not illustrated f or the company colt manuf actur ing.
If the budgeted balance sheet indicates weakness of financial position, revising the
financial plan or correction would be mandatory.
Importance of regular cash budget in For d motor company:
i) elpf ul in planning: Cash budget help to make plan that allows efficient
use of cash. Whenever company run out of surplus or find weakness of
the plan they can change the plan.
ii) Estimate the f uture needs: cash budget f orecast f uture plan, f uture
surplus and amount in advance. It¶s help to raising f unds with profitable
way at reasonable terms and cost.
iii) Maintenance of cash balance: Cash based on liquidity enterpr ise and
cash budget helps to maintain the liquidity. It¶s suggesting adequate
cash balance at a f air margin f or the contingencies.
iv) Evaluation of per f ormance: cash budget evaluate the per f ormance of
company in per iod of time.
v) Sound dividend policy: Cash budget plans f or shareholders dividend
and consistent with the liquid position of firm. Its helps to f ollow the
dividend policy.
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Assignment on costing and budgeting
Page 17 of 23
YousufHasan Id no:6650
Answer outcome (3.3)
Estimated cash receipt :
January February March Budgeted sales £ 40,000 £1,120,000 £1,120,000
ote: £ 40,000= £ ,200,000X 20%
£1,120,000= £ ,200,000X 5%
Titan Ltd
Schedule of Collections f r om Sales For the Three Months Ending March 31, 2012
January February March
Receipts f rom deposit :
Cash sales 10% X current month's sales
- ote A)
£ 4,000 £112,000 £112,000
Receipts f rom cash sales:
Collections f rom pr ior month's sales 50%
of previous month's sales - ote B)
£ 20,000 £560,000 £560,000
Collections f rom pr ior month's sales 5%of previous month's sales - ote C)
£224,000 £ 92,000 £ 92,000
Total receipts f r om sales on account £608,000 £1,064,000 £1,064,000
ote A: £64,000= £640,000 X 10%
£112,000= £1,120,000 X10%
ote B:£ 20,000=£640,000 X 50%
£560,000 = £1,120,000 X50%
ote C: £224,000 = £640,000 X 5%
£ 92,000=£1,120,000 X 5%
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Assignment on costing and budgeting
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YousufHasan Id no:6650
Estimated Cash Payments Estimated cash payments are planned reductions in cash f rom manuf actur ing costs,
selling and administrative expenses, capital expenditures, and other sources, such as buying secur ities or paying interest or dividends. A suppor ting schedule can be used in estimating the cash payments f or manuf actur ing costs.
January February March
Manuf actur ing costs £40,000 £80,000 £80,000
ote: £40,000 = 200,000X20%
£80,000 = 200,000X40%
£80,000 = 200,000X40%
Completing the Cash Budget
Titan Ltd.Cash Budget
For the Three Months Ending March 31, 2012
Estimated cash receipts f rom: January February March
Cash sales £64,000 £112,000 £112,000
Collections of accounts receivable £608,000 £1,064,000 £1,064,000
Total cash receipts £672,000 £1,176,000 £1,176,000
Estimated cash payments f or:
Manuf actur ing costs £40,000 £80,000 £80,000
Payroll £9,000 £9,000 £9,000
Administrative expenses(office rent) £ 0,000 £5,000 £5,000
Var iable production costs £ ,700 £6,475 £8, 25
Adver tising £20,000 £10,000
Administrative overhead £700 £700 £700
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Assignment on costing and budgeting
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Total cash payments £103,400 £111,175 £103,025
Cash increase(Decrease) £568,600 £1,064,825 £1,072,975
Cash balance at beginning of month £200,000 £768,600 £1,833,425
Cash balance at end of month £768,600 £1,833,425 £2,906,400
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Assignment on costing and budgeting
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YousufHasan Id no:6650
Answer outcome Task-4
(i) Mater ials pr ice var iance: (SP-AP) X AQOr
(SP X AQ) ± ( AP X AQ)
(£45 X 86450) ± [(£4379800/96500)*86450)
£3,890,250 ± £3,923,665
=33,415 (Unf avourable)
Mater ials usage var iance: (SQ-AQ) X SP
{(10kg X 8,250) ± 86,450} X £45.00
(82,500 ± 86,450) X £45.00
= -£177,750 (U)
Total mater ials var iance: (SQ X SP) ± ( AQ X AP)
(8250 X 10 X £45) ± £3,923,665
£3,712,500 - £3,923,665
= -211,165
(ii) Labour rate var iance: (SR ± AR) X A
Or
(SR X A ) ± ( AR X A )
(£60.00 X 32,000) ± (£1,968, 000)
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F. O. Capacity var iance: (BH ± AH) X SR
{(4 X 8,000) ± 32,000} X £15
= £00.00
F. O. total var iance: ( A. F.O.H. ± S. F. O. H.)
(£117,500) ± (8,250 X £15)
= £ 6,250 (F)
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Assignment on costing and budgeting
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Ref erence
Ahmed, . (2004) M
t A
t ing New Delhi: Anmol publication ltd
AW Willsmore(1973), B iness B get s in p t ice, Pitman publishing.
Accounting coach.com, H. Averkamp. (19 may 2009) w !
t is "
get?(http://blog.accountingcoach.com/what-is-a-budget/)
Amer ican council on education, Natalie K. (2003) w ! t is " get?
(http://www.acenet.edu/resources/chairs/docs/Krawitz_what _ isFMT.pdf )
Harvard business press(2009) p e p ing " get Harvard business school
publishing corporation
Hopwood A , An Account ing Sy st em nd M
nagerial Behaviour , Saxon
House, 1973.
Joel E. Ross,Tot al quali ty management: t e#
t , cases, and readings ,CRC press,1999.
William Baumol (1968), Ent re preneurshi p in Economic Theor y . Amer ican Economic
Review, Papers and Proceedings
William O. Clever ly(1989), H and " ook of heal t h care account ing and finance, Aspan
publications, Inc.