Task 1

1a) Calculation of Prime Cost

Prime cost is the sum of the direct material cost and direct labour cost
Therefore, Prime Cost				In £
Direct Material cost				314.865*
Direct labour Cost(Given)				142.16
		Prime cost		457.025
Direct Material Cost
	Quantity (in Kgs)		Rate/kg ( in £)		Total (in
Material J	21.4				304.69*
Material Q	3.7		2.75		10.175
Direct Labour Cost
	Number of hours worked		Rate per Hour (In £		Total cost
Grade IV labour	16		4.78		76.48
Grade VIII labour	8		8.21		65.68

*Note: Please Refer WN1

WN1

Calculation of cost of Material J transferred to Job Code X423
Date	Activity	Quantity	Rate	Total
1-Sep	Opening balance	28.7	14.3	410.41
8-Sep	Purchase	30	14.2	426.00
18-Sep	Transfer to production job code X431	-20.6	14.3	-294.58
21-Sep	Transfer to production job code X423	8.1	14.3	115.83
21-Sep	Transfer to production job code X423	13.3	14.2	188.86

 

1.b) Prime cost per component

Calculation of prime cost per component
Material	69%
Labour	31%

i) Conversion of cost per kilogram to Index number

	March	August
Cost per kilogram	£8.90	£11.80
Base rate ( January 2014)	£9.20	£9.20
Index	97	128

ii) Calculation of expected cost for December 2014

Index number for Dec-14	142
Base Cost (January 2014)	9.2
Expected cost	13.1

iii) Calculation of Percentage increase in the cost per kilogram of Material J from January 2014 to December 2014

Month	Cost per kilogram
Jan-14	£9.20
Dec-14	£13.06

The formula for calculating the percentage increase in the cost is as follows

((B-A)/A*100)

Where A is the starting year a 'B' is the ending year. January 2014 being the starting year and December 2014 is the ending year.

We have ((13.06-9.20)/9.20*100)

Therefore, percentage increase by 42%

1.d) Brief Notes on Different costing Methods

We have discussed the different types of costing. now it’s time to apply them to practicality. Let’s know the applications of all the categories of costings.

The main applications can be described as: FIFO and AVCO.

Talking of a conventional approach toward the process of costing, it is believed that the period that a good might sustain staying at a warehouse tags its priority to move out of the warehouse. It is also said that after the process of manufacturing, it must be sent to the end user i.e. customer.

But, why such a restless method is preferred?

It is believed according to FIFO that the manufactured product should not be kept idle at the warehouse as a certain level of depreciation is involved with it and erosion of the product is also possible.

What is AVCO?

Talking about AVCO, it is stated that a product can be weighted as the rough average of the available products that are kept in warehouse. Hence, if a product exceeds or precedes the level of weightage, it is to exit the warehouse prior to others.

What is Activity Costing Process?

As per the activity costing process, the cost that is involved in each stage of the process should form an inclusion in the whole process and in per unit cost. This takes into account the activities that are included in the process of production and management. (Izhar and Hontoir, 2001)

Task 2

2. A) Techniques could be used by AA (Ace Accountant)

As the 3D Game AA is about to be launch during the peal selling season, the merits and demerits of the gaming program can be analyzed by using the Life Cycle Costing technique in the following way.

The fixed costs and variable costs of product manufacturing are involved in the Life Cycle Costing. It is necessary to have a competitive edge over the rivals to survive in the competitive market. The overall revenue and costs throughout the estimated life of the product needs to be calculated so as to determine the feasibility of the product which depends upon the profitability of the product during the life span of the product. In case of the Life Cycle Costing following techniques can be used:

1. To uphold the uniqueness and to attract a particular group of people, proper survey should be done to installation, upgrade and modify the AA 3D Game because it needs a higher cost and a high level of data charges cost is involved.
2. To deliver a user friendly gaming program, proper R&D team should be there to upgrade the game and also to ensure that the present and future expenses are not more than the revenue.
3. The future supplies of game in every part of the targeted region and also the customer satisfaction should be properly analyzed.

The characteristics of target costing are summarized as:

1. Target Costing signifies that when a new product is launched in the market there should be minimum recovery of the costs to ensure profitability.
2. To ensure the smooth formulation of the next step of management planning, there is concentration on a target customer for a certain period of time to cover targeted revenue amount.
3. The primary objective is to cover the total installment cost not at a glance but gradually with the increase in the market share over a period of time. (Dhillon, 2013)

2. B) Target costing for the new game LL

To calculate the target costing for the new game LL includes following:

=Target Selling Price per customer x lifetime sales volume

= 200000x55

= 1100000

To reach the target BEP, the firm has achieved the target of 1100000. The disadvantages of live dream are as following:

1. If the 3D game has been launched already and it has become a popular game, so the customers would expect high from the next game LL. The popularity of 3D game provides a chance of a good opening of the new game launch LL, but at the same time creates the chances of its comparison with the 3D game. Thus if the new game fails to impress the customers, its sales might drop as a consequence.
2. Hardcore advertising is needed to promote the second game if the first game is a failure.
3. Thus there are high costs of developing and advertising in the gaming business.

2. C) TQM and Kaizen used by Live Dream

TQM is a management technique that involves all the employees from labor to management of the company to deliver quality products. It is a participative technique that makes the employees to associate themselves with a common project of the company. Kaizen approach is a part of TQM technique that mainly supports the existence of all class of employees in the company. This technique can be used by LIVEDREAM that will lead the company in the following manner:

1. With the proper co-ordination of the R&D team with the sales team the product can be sold in the market with greater efficiency.
2. There should be proper co-ordination in the after sales service team, sales team and the R&D team to ensure proper feedback and maintenance of the game.
3. The policy formulation and SWOT analysis should be conducted with the respective teams by the management.

2. D) Quality Performance indicators to monitor cost

LIVEDREAM manufacturing process is inclusive of constant development of the product. Few of the methods to reduce the cost are as following:

1. There should be contractual hiring of the R&D team and their research work should be applied on the periodical basis on the game.
2. There should be direct or indirect revenue generation in the form of money spending from the buyer side or installation cost from the game up gradation. (Braggs, 2010)

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Task 3

3.a) Cash flow statement and Budgeted Income and Expenditure statement for the first Quarters

Cash flow statement for the period April-June'14 for Alpine Tours

	April	May	June
Receipts	£	£	£
Opening balance		11221.25	16963.75
Sales revenue per trip	26520	26520
Total receipts	26520	37741.25	16963.75
Payments
Hotel cost	8478.75	16957.5	8478.75
Coach cost	3600	3600
Insurance bond cost	3000
Telephone cost			380
Sundry office expense	220	220	220
Total payments	15298.75	20777.5	9078.75
Net balance	11221.25	16963.75	7885

REVENUE	£
Sales Revenue	53040
Total (A)	53040
EXPENSES
Hotel cost	33915
Coach travel cost	7200
Insurance bond	3000
Telephone	380
Sundry office cost	660
Depreciation	100
Advertisement Expenses	3000
Total (B)	48255
Net profit (A-B)	4785

Below summed up is the justification for using overdraft facility of a bank:

What is the necessity of inflow and outflow form of cash?

In a business, it is nothing to say that cash is an important criterion in any of its stage; and here, we will take the concept of inflow and outflow for of cash flows. The inflow form refers to the source whereas, outflow form of cash flow refers to the point of implication. It is utmost importance to the bank manager when he should be keeping records of both the forms of cash flows.

What more should the bank consider when it comes to keeping record of the payment?

The bank should be in a position to understand the parties that are involved in the process of transaction, the amount of the money and also, the exact time when the transaction came into effect. Through this, they can exactly estimate the ratio of customer-organization relationship.

What do you mean by Consistency In Revenue?

This is quite essential in the field of business. This gives the trend of the revenue; for example, if there is an uptrend in the revenues, this implies an increase in the level of revenues that is earned by the business.

What are the importance of Costs or Expenditure?

These are integral elements in the process of a business and are useful components of a income statement. This gives us an estimation of the fixed and the costs that are still recurring and is therefore, examined by the bank.

What is the concept of Determination of Limit?

The bank is able to sum up a certain amount that is to be expended and hence, can determine its utility in the business activities and also consider the need for credit for the overall business. This is determined by the bank itself.

What does the available cash balance study imply?

This refers to the cash that is available when the operating cash and investing cash are incurred on the activities. At a certain moment, this needs to be determined for running the business activities of an organization. (Mahadevan, 2010)

3.b) Purpose and nature of Budgeting.

The purpose and nature of budgeting will be described in this section. This will give you a fair idea of how the process is implemented and then, driven for the sake of the business.

Budget can be simply defined as the process that is able to allocate the available assets to the departments of a business. In response, the management of an organization is considered to bring them into effect. Now moving to the next step, it is worth considering that proper planning and implementation is required for achieving the set objectives in a business. This eliminates any kind of difference in the organization and establishes a harmonious environment within the company.

Apart from this, Budget is often associated with finance in any organization, Its aim is to allocate the funds of a company to the respective departments of the company and this is performed before the financial year begins. Now, even if any alteration takes place in a team, it’ the sheer duty of the management of the organization to modify and amend changes in the budget plan of the company or that particular department. Before the stage of execution, budget centre is set up which decides its formulation and an in-depth study is conducted regarding the flow of cash within and out of the organization.

There should be proper coordination in every department and the whole company as well. A manager leads the team who needs to step up during crisis moments and might have to hold the responsibility of controlling other teams as well in crucial situations. The allocation of funds is further done on the basis of priority. Moreover, the budget can prove to be extremely helpful in determining the overall capability of different units of departments. The thing that is the most needed is a coordinating approach among the members of the organization. (Wildavsky, 1986)

Task 4

4.i) Flex budget

 

	Original budget -800units	Standard cost	Flexed budget 900units	Actual cost -900units	Total variance
	£	£	£	£	£
Materials
2kg x£6.60 x 800units	10560	13.2	11880	14580	5400U
Labour
1hr x £8.25 x 800units	6600	8.25	7,425	8550	1950U
Fixed overheads	12,800	4	12,960	19,400	6600U
Variable overheads	4800	1.5	5400	7400	2600U
Selling and administration overhead variance	3000		300	2800	200F
Sales
800units x £68.5	54800	68.50	61650	61650	6850F

4.ii) Calculation of Variances

a.Sales Profit volume Variance

b.Sale Price Variance

c.Direct Material Variances

1. The material price variance is expressed as;

             (Actual price x Actual quantity purchased) – (Standard price x Actual quantity purchased)

                        £14580– (£6.60 x 1,800kg) = £2700 U

ii. The material usage variance is expressed as;

            (Actual quantity x Standard price) – (Standard quantity x Standard price)

                        £11880– ((2kg x 800) x £6.60) = £1320 Unfavorable

1. Direct Labour Variance

 i.   The labour rate variance is expressed as;

            (Actual wage rate x Actual hours) – (Standard wage rate x Actual hours)

£8550 – (£8.25 x 900hrs) = £1125 Unfavorable

      ii. The labour efficiency variance is expressed as;

            (Actual hours x Standard wage rate) – (Standard hours x Standard wage rate)

            (£8.25 x 900) – ((1hr x 800) x £8.25) = £825 Unfavorable

1. Variance Production overhead variance

      i. Variable Overhead variances

                The Variable spending overhead variance is expressed as:

               (Actual hours worked x (Actual Overhead rate-standard overhead rate)

               3600(2.05-1.5) = £2000 Unfavorable

            ii. The Variable Efficiency overhead variance is expressed as:

                 Standard Overhead rate (Actual hours-standard hours)

                 1.5(3600-3200) = £600 Unfavorable

       f. Fixed Production overhead variance

       i. The fixed overhead expenditure variance is expressed as;

          (Budget fixed overhead cost - Actual fixed overhead expenditure in the period).

          £12800 - £19400 = £6600 Unfavorable

      g. Selling and administrative overhead variance

      i. The sales price variance is expressed as;

  (Actual selling price x Actual sales volume) – (Standard selling price x Actual sales volume)

 £61650 – (£68.50 x 900) = 0

    ii. The sales margin volume variance is expressed as;

(Actual sales – Budgeted sales) x standard profit margin

  (900 – 800) x £68.50 = £6850Favourable.

4.iii) Standard cost operating statement

4.iv) indifferentist among Statements

Aim:

The objective is to introspect the reasons that result in variance.

Findings:

In order to accomplish the mentioned objective, we need to find out the costs that are incurred on each department and unit of production in the organization. This can be best reflected through budget statement. Now, the problem is that there have been slight differences between the estimated and the actual results. 

Estimated Result: Profit of 17040

Actual Result: Profit of 8920

Below given is the reason for such a variance:

Sales Manager is responsible for Sales Margin volume variance. Actual sales exceeded estimated sales by 100 units.

Buying Manager is responsible for Material price Variance. Procurement took place at higher rates than it was budgeted.

Production Manager is responsible for Material Usage Variance. An exceeding level of sales were observed.

Labour rate Variance is looked after by HR Manager. It showed negative variance with a higher per hour procurement rate.

Labour efficiency variance witnessed no variance with an increase in actual sales by 100 units.

Variable overhead Efficiency variance is supervised by Operations Manager. Total Overhead showed negative variance.

Fixed overhead expenditure variance is looked over by a number of managers. Overhead was more than estimated.

Selling and distribution overhead variance is overlooked by a Sales Manager. It witnessed better Total Overhead.

Conclusion

Through this, we come to know the factors that resulted into such a variation.

Conclusion

An organization needs to focus on the costing patterns for a relatively smooth working. This can turn out to be a matter of concern if not taken into serious consideration. This can be quite decisive for any organization, if decision making is associated with it. Standard costing methods are used by the organizations to get the actual results and also get to know the reasons behind certain variances in the estimated results.

References

Dhillon, B.(2013). Life Cycle Costing: Techniques, Models and Applications. Gordon and Breach Science Publishers.
Bragg, S. (2010). Cost reduction analysis. Hoboken, N.J.: John wiley & Sons.
Izhar, Riad and Hontoir, Janet (2001). Accounting, Costing and Management. Oxford University Press.