ASSIGNMENT 2 FRONT SHEET

Qualification BTEC Level 4 HND Diploma in Business

Unit number and title Unit 5: Management Accounting (489)

Submission date 30/12/2021 Date received (1st submission)

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Student name Tran Minh Thi Student ID GBS210001

Class GBS0908 Assessor name Truong Ngoc Thinh

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 Table of content
I. Main content
A. Explain costs and different type of costs
1. Definition of cost
2. Type of cost
2.1 Manufacturing vs non-manufacturing cost
2.2 Direct vs indirect cost
2.3 Fixed vs variable cost
2.4 Opportunity cost
2.5 Sunk cost
B. Explain budget and planning tools for budgetary control
1. Definition of budget
2. Explain the methods of budgeting: top down, bottom up and
participative. Give the cost and benefit of each methods
3. Types of budget
3.1 Operating budget or master budget
3.2 Capital budgets
II. Practical question
III. Reference
I. Main content
A. Explain costs and different type of costs
1. Definition of cost
Cost is the cost incurred to manufacture or sell a product or to prepare an asset for normal use
(O’sullivan and Sheffrin, 2003). That is, the cost of making the product, stocking it, selling the product, or
preparing the equipment for commercial use. Both fixed and variable costs have different costs, but they
are all solved in the same way. Cost is recognized as an expense in the statement of income during the
reporting period and settled on the last item.
 Example:
Cost is the cost incurred to manufacture or sell a product or to prepare an asset for normal use.
That is the cost of making the product, stocking it, selling the product, or preparing the
equipment for commercial use. Both fixed and variable costs have different costs, but they are all
solved in the same way. Cost is recognized as an expense in the statement of income during the
reporting period and settled on the last item.
2. Type of cost
2.1 Manufacturing vs non-manufacturing cost
 Manufacturing cost
The main cost category for manufacturing enterprises is the cost of production. This includes the
cost that must be incurred to produce the inventory (Termscompared, 2021). Production cost is
the sum of all costs incurred by an organization in the production of a particular product.
The formula for computing total production costs is as follows:

Manufacturing expenses are calculated = direct material costs + direct labor costs + all
manufacturing overheads.
 Direct material costs include all materials and consumables used as inputs in a
manufacturing process, and their use can be attributed directly to an organization's end
product (Termscompared, 2021). These are mainly raw materials and packaging
materials.Textiles, buttons, threads, packing boxes, and other clothing-related goods are
examples of direct materials. Similarly, the total cost of fruit pulp, sugar, flavoring, and
food preservatives required to make different types of jam at the Mitchells Food Factory
is an example of direct material cost.
 Direct labor cost covers all pay and other monetary advantages granted to individuals
who work in the manufacturing process and whose employment is directly related to the
items created (Termscompared, 2021). The sum of all pay and benefits provided to
pattern cutters, tailors, sewing machine operators, folders, and packers at a garment
factory is an example of direct labor cost.
 Manufacturing overheads cover any extra expenditures incurred throughout the
production process that cannot be immediately attributed to the finished goods
(Termscompared, 2021). These can include factory rent, factory building depreciation,
plant and machinery depreciation, insurance and maintenance costs connected with plant
and machinery, and expenditures associated with factory maintenance employees, among
other things.
  Non-manufacturing cost
Non-manufacturing expenses are those that are incurred for the entity's other business
operations but are not incurred during the manufacturing process (Termscompared, 2021). These
expenditures do not directly contribute to the manufacturing of goods, but they are necessary to
ensure the general operation of the firm.
 Selling Expenses: Selling costs are also known as sales and distribution costs. Advertising
costs, salesperson salaries and commissions, warehousing costs, shipping and handling,
and customer support are all examples.
 General Expenses: General and administrative expenditures, often known as
administrative and general expenses. Executive wages, administrative employees,
accounting costs, legal fees, research and development, and other expenses connected to
general corporate management are examples.
2.2 Direct vs indirect cost
 Direct cost
Direct costs are company expenses that may be applied directly to the production of a specific
cost item, such as a product or service (Gray, 2018). Cost objects are the items to which
expenditures are ascribed. Direct costs include the following:
 Explicit labor
 Materials in direct contact
 Materials for manufacturing
Variable or fixed direct costs are possible. Variable costs are expenses that vary according to the
number of things produced or services provided. For example, creating 200 toys would cost more
money than producing 100 toys. Fixed expenditures are expenses that stay constant month after
month.
 Indirect cost
Indirect costs are expenses that are incurred across many company activities (Gray, 2018). In
contrast to direct costs, indirect expenses cannot be assigned to specific cost objects. Indirect
expenses include the following:
 Rent \Utilities
 Office expenditures in general
 Employee wages (e.g., administrative)
 Professional fees
 Other overhead expenses
Indirect expenses, like direct costs, can be either fixed (e.g., rent) or variable (e.g., utilities). The
overhead rate formula is as follows:
Overhead Costs / Sales = Overhead Rate
2.3 Fixed vs variable cost
 Variable cost
Variable costs are costs incurred by a business as a result of the number of goods or services produced.
Variable costs fluctuate according to the company's output (Nickolas, 2019). As output increases,
variable costs increase. However, as volume decreases, variable costs also decrease.
Variable costs vary widely by sector. As a result, comparing the variable costs of, for example, an
automobile manufacturer and a home appliance manufacturer is meaningless because the outputs are
not similar. As a result, it is desirable to compare the variable costs of two companies in the same
industry, such as two automakers.
Assume ABC manufactures ceramic mugs at a cost of $2 per mug. If the business manufactures 500
pieces, the variable cost is $1,000. However, if the corporation does not create any units, there will be no
variable expenses for manufacturing the mugs. Similarly, if the firm manufactures 1000 units, the cost
will increase to $2,000.
 Fixed costs
Unlike variable costs, a company's fixed expenses do not fluctuate with output volume. Fixed costs stay
constant regardless of whether or not products or services are generated (Nickolas, 2019). As a result, a
corporation cannot avoid fixed costs.
Using the same scenario as before, imagine firm ABC has a set monthly cost of $10,000 to rent the
equipment it uses to make mugs. Even if the firm does not create any mugs throughout the month, the
cost of renting the machine will be $10,000. However, if it produces one million mugs, the fixed cost
stays the same. In this case, the variable expenses range from $0 to $2 million.
2.4 Opportunity cost
The potential gain that an individual, investor, or corporation foregoes by selecting one choice over
another is referred to as opportunity cost (Fernando, 2019). Because opportunity cost is by definition
unseen, it is easy to overlook. Understanding the possible possibilities that a firm or individual may miss
by selecting one investment over another might assist them in making an educated decision.
 Opportunity Formula and Calculation
Opportunity cost = FO - CO, where:
FO: denotes the return on the best foregone option.
CO: return on selected option
2.5 Sunk cost
Sunk costs are funds that have already been spent and cannot be retrieved. The phenomenon of the
sunk cost reflects the notion that one must "spend money to make money" in business (Tuovila, 2021). A
sunk cost is distinct from future costs that a company may incur, such as inventory acquisition costs or
product price decisions. Sunk costs are not included in future business choices since the cost remains
constant regardless of the outcome of the decision.
A sunk cost would be paying $5 million to create a plant that is estimated to cost $10 million. The $5
million already spent—the sunk cost—should not be considered when considering whether or not to
construct the plant. What should be important instead are projections of future expenses and profits
after the plant is up and running.
Economic analysis disregards sunk costs to protect decision-makers from pouring good money after bad
when they are trapped in an unproductive undertaking (Tuovila, 2021). It is common for a large initial
investment in a bad project to lead to a desire to spend additional money on the project in the
expectation of recouping the sunk cost or avoiding shame. Economic theory attempts to address this
issue by concentrating solely on future costs and rewards.
B. Explain budget and planning tools for budgetary control
1. Definition of budget
A budget is a prediction of revenue and spending for a certain future time that is typically developed and
updated on a regular basis. Budgets can be made for an individual, a group of people, a business, the
government, or nearly anything else that makes and spends money. Budgeting is vital for controlling
monthly expenditures, planning for life's unpredictable events, and financing large-ticket items without
going into debt. Keeping track of your income and spending does not have to be a pain; it does not
require you to be a math genius, and it does not preclude you from purchasing the products you desire.
It simply means you'll have better control over your finances since you'll know where your money is
going.
2. Explain the methods of budgeting: top down, bottom up and
participative. Give the cost and benefit of each methods

TOP - DOWN The technique of making judgments based on a large number of factors is known as
top-down analysis (CFI, 2019). The top-down technique seeks to identify both the big
picture and all of its individual elements. These factors are typically the driving force
behind the final result. The terms "macro" and "macroeconomics" are frequently
associated with top-down thinking. Macroeconomics is the study of the most essential
factors impacting the economy as a whole. These components include the federal
funds rate, unemployment rates, global and country-specific gross domestic product,
and inflation rates. An analyst seeking for a top-down perspective wants to know how
systematic components impact an outcome. Understanding how large-picture patterns
affect the whole firm can be challenging in corporate finance. The same concept may
be applied to budgeting, goal planning, and forecasting to assess and regulate macro
issues.

BOTTOM - UP The bottom-up strategy differs greatly from the top-down technique (Gaffney, 2018). In
general, the bottom-up approach focuses on the specific features and micro attributes
of a single stock. Bottom-up investing focuses on fundamentals at the business or
industry level. This research seeks profitable chances by using the peculiarities of a
company's features and values in comparison to the market.

Bottom-up investing begins with a company's research but does not stop there. These
evaluations have a major emphasis on business fundamentals, but they also include
sector and microeconomic concerns. As a consequence, bottom-up investing may be
broad throughout an entire industry or tightly focused on a few key features.

PARTICIPATIVE Participatory budgeting is a procedure in which individuals who are affected by a

budget actively participate in the budget formulation process (Thakur, 2020). This
method offers lower-level managers a stronger sense of responsibility over the budget
that results. Because a strictly participatory budget does not account for high-level
strategic issues, management must offer employees guidance regarding the general
direction of the firm and how their respective departments fit into it.

When participatory budgeting is implemented throughout a company, preliminary

budgets make their way up the corporate hierarchy, being evaluated and perhaps
amended along the way by mid-level management (Thakur, 2020). Once the submitted
budgets have been integrated into a single master budget, it may become clear that
 they will not work together, in which case they are returned to the originators for
another iteration, generally with instructions indicating what senior management is
looking for.
 Pros and cons of budget methods:
Advantages
TOP - DOWN  Because senior management is
concerned with the organization's
overall growth, the budget takes
an overarching corporate
functional approach. It enables
management to distribute
resources to departments with the
goal of driving the company's
growth, beginning with the most
vital departments.
 Budgeting from the top-down
saves time for lower management.
Lower-level managers are given an
already-formulated budget to
implement rather than spending
time drafting a budget from the
start. This saves the managers
both time and resources that they
would have had to utilize to create
the budget.
 Top-down budgeting establishes a
single budget at a time, as
opposed to enabling departments
to build their own budgets and
then merge them. As a
consequence, the budgeting
process will be less time-
consuming since top management
will create a single budget that all
departments will adhere to.
Departments are only permitted to
construct budgets based on the
Disadvantages
 The degree of motivation drops
because the managers who are
responsible for budget
implementation do not own the
budget-making process. Managers
may lack incentive to assure the
budget's success if they do not
participate in its creation.
 Because senior management is not
involved in the day-to-day
operations of different
departments, they may not have
realistic estimates of the costs
associated with each department.
As a result, lower-level managers
may struggle to implement the
budget since they are uninformed
of how upper management arrived
at the stated goals. Furthermore,
the budget may be erroneous since
the income and expense
projections may be overestimated
or undervalued.
 goals established by the senior
management's initial budget. This
speeds up the budgeting process
compared to bottom-up
budgeting.
BOTTOM - UP  Bottom-up budgets are often quite
precise since each department
creates the individual line items of
its budget using its specific
expertise. This sort of budgeting
method boosts corporate morale
and employee engagement since
the entire team participates in
budget creation and takes more
responsibility for meeting
budgeted goals.
 Some departments have budgets
that are partially dependent on
operations in other parts of the
organization, and communication
typically improves as teams work
together to define associated
goals. The budgeting process also
assists management in gaining a
better grasp of and dedication to
the company's goals.
PARTICIPATIVE  Participatory Budgeting enables
the sharing of important
information from lower-level
management to top-level
management. There can be a
smooth flow of information and
timely reports supplied by the
relevant department.
 Because the information is being
sent by the appropriate
 Deviation from the Organization's
Goal
A budget established by an
individual with the least amount of
expertise may stray from the
organization's goal. And will not
make the firm any wealth.
 Overspending
There is a good chance that if one
department goes over budget. It
may cause the other department to
increase its budget. Every
department in the organization
must be provided equal possibilities
for advancement.
 Long Timeframe
Integration of all smaller budgets to
generate an integrated budget for
the entire organization usually
takes longer. A thorough
examination and implementation of
the budget estimate takes time.
 Because of the higher number of
employees engaged in participatory
budgeting, creating a budget takes
longer than it does with a top-down
budget established by a much
smaller number of individuals. The
labor cost of developing such a
budget is likewise rather significant.
 Another problem with participatory
budgeting is that budgeters are also
 department, there is very little
danger of over/under budget
planning because the relevant data
has been given.
 The subordinate level is also
included in the decision-making
process, and everyone is given an
open platform to provide feedback
for the budget's improvement.
This results in increased staff
morale and, as a result,
achievement of organizational
goals.
 Because both parties have
revalidated their work and
demonstrated interest in them,
confidence in both superior and
lower level management is
restored.
 This participation allows for the
effective allocation of resources,
with little waste, and the
formation of an accurate, realistic
budget.
subject to measuring their
performance against themselves, so
participants spend extra money and
budget conservatively so they can
be reasonably confident that they
can achieve what they set out to
do. There is a tendency to create a
budget. When employees are
awarded incentives based on their
performance versus the budget,
this propensity becomes more
prominent. This budgetary slack
problem can be minimized by
implementing a budget review by
those members of management
who are most likely to recognize
when budgets are being inflated
and who are permitted to make
necessary modifications. Only by
using this method may stretch
objectives be incorporated into a
budget.

3. Types of budget
3.1 Operating budget or master budget
 Operating budget
An operating budget is a comprehensive prediction of a company's revenue and spending over a given
time period (BambooHR, n.d.). Companies often develop an operational budget near the conclusion of
the fiscal year to illustrate projected activities for the next year. An operational budget assists companies
in setting and achieving business objectives. Managers may compare actual results to the operational
budget each month or quarter and examine the outcomes, asking questions such as:
 Are sales higher or lower than projected?
 Were there any unanticipated costs?
 Is it necessary to revise statistics for the rest of the year?
Analyzing the outcomes can assist businesses in adapting to changing situations, updating their activities
and strategies as needed, and achieving improved performance.
The more thorough an operational budget is, the more useful and relevant it becomes. A high-level
summary of an operational budget may be included, along with multiple supporting sub-budgets that
give more information. The following are the most frequent elements of an operational budget:
  Revenue: This comprises all of the various ways a corporation generates revenue through selling
goods or services. Revenue projections can be based on a basic year-over-year comparison, but
breaking revenue down into its underlying components, such as unit volume and average price,
can provide more information.
 Variable cost: Costs that rise and fall with sales. Fees for raw materials, labor, freight and
sales are just a few examples.
 Fixed cost: A fixed expense is one that remains generally consistent across time. You must pay
whether sales increase or decrease. Some examples include rents, utilities, equipment rentals,
and insurance.
 Non - cash expenses: Depreciation, amortization, unrealized profit or loss, inventory-based
compensation, and deferred income tax are the most common non-cash expenses.
 Non - operating expenses: Expenses that are not directly related to the company's core business.
The most common non-operating expenses are interest payments, losses on the disposal of
assets, and foreign exchange costs. Other items may be included in the operating budget of some
businesses or organizations. On the other hand, capital expenditure is often not included in the
operating budget because it is a long-term cost while the operating budget is short-term.
 Master budget
The state budget unites all low-level budgets and planned financial statements, cash plans, and financial
plans generated by the various functional departments of the company (Bragg, 2018b). A core budget is
often provided on a monthly or quarterly basis and covers the entire fiscal year of the company. A
statement that describes the strategic direction of the company, how the core budget will help achieve
specific goals, and the management actions necessary to meet the budget can be incorporated into the
core budget. There may also be a discussion of the workforce changes needed to stay on the budget.
A master budget is the core planning instrument used by a management team to coordinate a
corporation's activities as well as to evaluate the performance of its numerous responsibility areas. It is
typical for the senior management team to go over several versions of the master budget and make
changes until it reaches a budget that distributes monies to accomplish the intended outcomes. Ideally, a
corporation will use participatory budgeting to arrive at this final budget; nonetheless, it may be forced
on the organization by top management with minimal participation from other employees.
3.2 Capital budgets
Capital budgeting is the process through which a company examines potential large projects or
investments (Kenton, 2020). Capital budgeting is essential before a project, such as the construction of a
new factory or a substantial investment in an outside firm, may be approved or refused. As part of
capital planning, a firm may assess a potential project's lifetime cash inflows and outflows to check if the
predicted returns meet a predetermined standard. Capital budgeting is also known as investment
appraisal.
II. Practical question
Question 1:
1. Calculate the contribution margin per unit for each pair of shoes
The contribution margin per unit for each pair of shoes:
$80 - $20 = $60
2. Calculate the total contribution margin if 1,200 pairs of shoes were sold.
The total contribution margin if 1,200 pairs of shoes were sold:
 $60 x 1200 = $72,000
3. Determine the breakeven point in sales of pairs of shoes.
Break Even point in units sold, N is the units sold:
$60,000 + $20 x N = $80 x N
⇒ N = 1000 (units)
4. Determine how many sales of shoes would need to be sold to earn Green Sole Shoes' target profit of
$90,000.
“Y” is the sold units needed to earn $90,000 profit:
Y x $80 - ($60,000 + Y x $20) = $90,000
⇒ Y = 2500 units

Question 2:

Absorption cost Variable cost

Variable cost per unit $6.96 $6.96

Fixed cost per unit $2.4

Total cost per unit $6.96 $6.96

Absorption cost Variable cost

Beginning inventory $0 $0

Production $1,404,000 $1,044,000

Total good available for sale $1,404,000 $1,044,000

Ending Inventory $280,800 $280,800

Cost of goods sold $1,123,200 $835,200

Absorption cost income statement sock company for the year ended
December, 31

Sale $2,160,000

Cost of goods sold $1,123,200

Gross profit $1,036,800

Variable SG&A $108,000

Fixed SG&A $216,000

Total SG&A $324,000
expenses

Net operating $712,000

income

Variable cost income statement socks company for the year ended
December 31

Sale $2,160,000

Cost of goods sold $835,200

Variable SG&A $108,000

Contribution Margin $1,216,800

Fixed expenses $360,000

Fixed overhead $216,000

Total fixed expenses $576,000

Net operating $640,000

income

Question 3:
1. Sales budget
Quarter 1 Quarter 2 Quarter 3 Quarter 4

Sales unit $3,750 $1,250 $1,250 $3,750

Price per unit $70 $70 $70 $70

Total gross sales $262,500 $87,500 $87,500 $262,500

Sales discount & allowances 0 0 0 0

Total net sales $262,500 $87,500 $87,500 $262,500

2. Production budget

Quarter 1 Quarter 2 Quarter 3 Quarter 4

Sales unit $3750 $1250 $1250 $3750

Planned ending units of inventory 500 500 500 500

Total production required $4250 $1750 $1750 $4250

Beginning inventory of finished goods 0 500 500 500

Unit to be produced $4250 $1250 $1250 $3750

3. Material budget

Quarter 1 Quarter 2 Quarter 3 Quarter 4

Unit to be produced 4250 1250 1250 3750

Material cost per unit 18 18 18 18

Cost of materials required for production 76,500 22,500 22,500 67,500

Target ending inventory 6000 6000 6000 6000

Total material required $82,500 $28,500 $28,500 $73,500

Beginning inventory 6000 6000 6000 6000

Total budget cost of tubs $76,500 $22,500 $22,500 $67,500

4. Labour budget

Quarter 1 Quarter 2 Quarter 3 Quarter 4

Required production 4,250 1,250 1,250 3,750

Labour time per unit 0.5 0.5 0.5 0.5

Total labour hours required 2,125 625 625 1,875

Labour cost per hour 28 28 28 28

Total labour cost $59,500 $17,500 $17,500 $52,500

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