P.2. An appropriate costing system for Royal engineering.

Variance Analysis

The (difference) /distinction between the actual and standards are represented by means
of variance. There is symbol of necessity if actual cost is less than standard value and the
difference is formed as fundable variance but if the actual value are more than the standard costs
there is a symbol of necessity and the variance is irritating for royal engineering. Some deviation
are noticed when the actual presentation are denoted and benchmarked with the standard set. The
variation happened is the variance. Yet in royal engineering variance is the distinction between
the standard amount and actual amount during a set period. Hence in Royal engineering the
variance can be shown in a finish financial year for managerial decision making taking the
technology changes that has already happened., The distinction variance of royal engineering’s
standard costing systems at below-

1. Cost Variance
2. Price Variance
- Direct material variance
- Direct wages rate variance
- Variable overhead price variance
3. Usage Variance
- Direct labor efficiency variance
- Direct Material usage variance

According to the given data and calculation

(a) Material Price variance=4800(A)

(b) Material Usage variance=2800(F)
(c) Total material Cost variance=1000(F)

By if the material is purchased at GBP 14.80/kg.

(d) Variance of labor rate=3060(F)

(e) Variance of Total direct labor=74600(F)
For 2000 units labor hr required=17000Hr.
So labor rate variance= (17-17.5)*17000=8500(A)
(f) Total direct labor variance =52500(5)
So. Taken into consideration the technical develops and the managerial motivations variance
analysis can be the companies’ standard valuing system.

P.3. Use and suitability of different costing system in an organization.

Recommendations in costing Technique:

For an effective costing system, following requisites are necessary:

A well-reviewed planning.
Technique suited to organizational needs.
Recognition of and dealing with reluctance.
An obstacle - free communication.
Redundant can be reduced but it should not be eliminated.
Expensive and complex technique implementation.

Use of costing technique in Royal Engineering:

An effective and well planned costing system yield 3 – fold benefits:

Particular Concern
Increase in profits
Improved financial situation
Competent capabilities
Marker of efficiency
Industry Concern
The company can be a trend-setter henceforth.
Concern of the Nation
Efficient utilization of scanty resources.
Market sustenance enhanced through new customer base.
Fighting inflation.

P.4. Budgeting

The Budget is formal assessment of the available financial resources which will be used to
implement actions in a period of time. A Company’s activities are concentrated through the
budget.

Budget Control measures actual results with budgets.

Advantages of Budgeting:
Promotes coordination &communication within the company.
Budgeting offers a clear picture of the areas of responsibility.
Performance reevaluation is an outcome of budgeting.
Employees engaged in ten budgeting are motivated towards optimum output.
Budgeting involves and seeks for maximum utilization of organization resources.
Management of time and economy.

Drawbacks of Budgeting:

Sometimes creates unnecessary pressure resulting in adverse labour relations, departmental

conflict, and overestimation of costs.

Characteristics of a Budget:

Participative: Makes participation possible.

Comprehensive: includes the entire workforce.
Standards: sets performance standards.
Feedback: involves a constant monitoring.
Cost and revenue analysis: product lines or cost centers allow for this analysis.

Elements of Successful Budgeting:

Must project accurate business forecasts.

Proper co-ordination of business activities.
A successful Budget must be comprehensive.
All departments of the company must put in place a framework for evaluation.
Flexibility is allocation of resources and resources are indispensible for a successful budget.

P.6. the need for corrective actions:

(1) Consolidation of vender: Charges in the prices of raw material must be followed closely and
purchase must be in keeping with standard rate of raw material.

(2) Value Analysis: Develop a systematic new product/process development for customer
satisfaction.

(3)Outsourcing of congregation: In case of internal decision making system not functioning,

advice from external experts must be taken.

(4)Consistency: the costing system must be under constant surveillance including review,
planning, and implementation.

P.7. Implementation of Program of Corrective Actions:

In order to cut costs, accountability and accurate reporting must be effected. More importantly,
the workers must have specific cost target so as to control the output. A constant evaluation of
the work being done along with up-gradation of management system is another way of
implementing the program. Financial experts need to train managers within a stipulated time
frame so that they develop their core competencies.

P.8. Value Analysis:

Value Analysis involves improving the value of a process or a product through an evaluation of
its components or attributes and their respective costs. The analysis then either manages costs or
increases value of the function of associate components.

Function of customer satisfaction

Value¿
Costs of the function

Function=remains the same

Value analysis = remains the same

Need= remains the same

Benefits of using value analysis:

The focus shifts to the customer thereby ways of satisfying customer are found. Costs irrelevant
to customer satisfied are identified and terminated. A platform for bold, creative, and innovative
ideas is provided which gives the company a competitive edge in the market. A system is
devised where a new product/process development takes place smoothly.
Barriers to systematic value analysis:

A tendency to issue generalized, phony statements might arise. Hence, authentic sources
should be given preference. Rather than emphasizing on the functional entity alone, a
concerted effort to collect, analyze and conclude all costs in the costing system will prove
successful.

P.9. Activity-based Costing System:

Effective in the long run than in the short term, Activity-based costing system focuses on
operating costs of specific activities such as planning, engineering, manufacturing, etc. This
method brings to light profitability sector of product/services/resources-thus, it helps the
leadership take better-informed decisions.
 For ABC analysis, a well – chalked plan & commitment from senior level management is
indispensable. A trial study of those areas which are not achieving projected profits is an
effective method. Cost-trimming measures need to be determined clearly or the ABC analysis
might prove counter-productive for the company.

In ABC analysis, goods are categorized as

A=High costing goods

B=Low to moderate cost

C=Bulky goods of lower value.

The category of ‘A’ is to be emphasized since they consist of 80% of our investment while
making up 20% of our goods space.

Activity-Based Costing Versus Traditional Costing

Traditional Costing Systems

Allocates, overhead costs broadly using single predetermined rate.

Job order costing: direct labor cost is automatically assumed as relevant activity base. Process
costing: machine hours become relevant activity base.
Assumption (labor) was relevant when direct labor was a major portion of total manufacturing
costs.

Wide acceptance of a high correlation between direct labour and overhead costs.

-Remains the same-

Need for a New Approach:

Huge changes in manufacturing & services industries.

Decrease in direct labor chunk.
Significant increase in total overhead costs.
In case of a lack of correlation, Traditional costing system’s assumption of predetermined
overhead rates may be ineffective.
Complex manufacturing processes may require multiple allocation bases.

Activity – Based Costing (ABC) Terms:

Activity: remains the same
Activity Cost Pool: remains the same
Cost Drivers: remains the same

ABC allocates overheads costs in two stages

Stage 1 Stage 2

Overhead costs are allocated to activity cost pools. After Stage 1 , overhead costs are assigned
to Products using cost drivers

Cost drivers:- remains the same-

ABC is preferred in the following conditions:

When products differ greatly in volume/manufacturing complexity.

When product lines are numerous, diverse and require various stages of support services.
When overhead costs are a significant portion of total costs.
When there is a visible change in manufacturing process or number of products.
When managers used ‘bootleg’ costing date instead of existing system data.

Activity-Based Costing and Performance Mgt:

ABC is once again gaining recognition as a process for improving BPM results in
mainstream business circles. In a survey by Better Management. Com ,520companies were
asked for opinions on ABC. 87% said that they are either using ABC methodology already or
are doing serious thinking on employing ABC completely to replace traditional cost
accounting.
 There are several reasons for the re-emergence of ABC practice:

 Economic downturn: The recession-hit global economy has brought ABC back into
notice as companies take no risks in creating new customer base. They rather
concentrate on retaining the earlier clientele. ABC comes into use here as it separates
profitable ventures from loss-making ones. ABC also suggests new ways to enhance
profits without having to raise prices of products & services.
 Driver-based budgeting: Traditional Excel-driven budgeting and planning which is
broadly based on gut feel and instinct is now being questioned for its lack of focus on
business interests. From being seen as a software application, ABC is now being used
to base budgeting on driver.
 Customer intelligence and valuation: Sectors like banking and telecom which center
on customers are increasingly realizing that their growing top-line also implies that
their customer base keeps growing and their customers retain their loyalty to their
product/services. ABC helps to bring to the notice of the companies that the top-line
growth contributes to the bottom-line growth. ABC helps companies realize the value
that customers bring to the business.

Further analysis of ABC methodology:

From a standalone software application, ABC has moved on to being a strategic business
measurement and analysis tool. Activity-based budgeting, customer /product profitability can use
the assistance of ABC models. These performance measures depend greatly on ABC cost, driver-
quantity, cycle time, and synergy that exists between planning &activities. Companies like
Oracle, SAP, Hyperion, and SAS have adopted ABC after a initially slow start. For smaller
vendors and small-scale ABC applications the survival may not be feasible.

Steps for small-scale ABC applications to survive.

 Defining the project scope.

 Identify activity-drivers and delegate responsibility.
 Lay out the process-Flow clearly
 Collate date.
Differences between Traditional & Activity Based Costing

Traditional cost models apply resources to products in 2 ways . Direct attribution to material &
direct labor form one part of traditional cost models. These are attributed to the product directly.
On the other hand, other resource costs are allocated to the product, Sales, marketing,
administrative products are not included in product costs and grouped separately.

ABC does not alter the way material & direct labor are allocated to product cost. The only
exception is direct labor does not feature prominently anymore . It is considered another cost
pool which is to be distributed to processes & products in a meaningful manner.

(1) ABC primarily breaks down indirect activities into pools dissected meaningfully. The
costing is put through an analysis which reflects the way costs are incurred. ABC, as a
system, encourages the understanding that resources are consumed by processes or
products in varying proportions for every activity.
(2) Activities have no inherent costs. Resources consume these activities. Resources may be
material, labor, space, equipment and services . ABC concludes that all costs reside in
resources.
(3) In ABC, each resource and activity has a unit of measure which defines the amount of the
resource consumed or activity required by a unit of demand for it. Sometimes, resources
can be inter-consumptive. For instance office space resource is consume4d by employee
resource). Activities and cost objects also fall into this purview. Also, hiring personnel
may be a cost object of HRD.
(4) ABC takes into account activities that can be performed in support of another activity. A
cost object could be a process or product and an interim cost or an end user, examples are
when invoice printing activity supports the billing activity. Another instance is hiring
personnel which may be a cost object of HRD that utilized space, utility, telephone,
supply and labor resources.
(5) Mentioned before was a point which stressed the laying out of a process flow. This
includes building a network of resources, activities and costs object. Each resource and
activity has a unit of measure which converts them at a unit of demand rate. A cost model
proves useful and effective in determining product costs. What becomes clear is that
business process should be identified and cleared first. Only then can costs be connected
to affix the cost of the process flow.