Management Accounting and Budgeting

The subject ‘Cost and Management Accounting’ is very important and useful for
optimum utilisation of existing resources. These are branches of accounting and had been
developed due to limitations of financial accounting. It is an indispensable discipline for
corporate management, as the information collected and presented to management based on cost
and management accounting techniques helps management to solve not only specific problems
but also guides them in decision making. Keeping in view the importance of this subject
The main purpose of the budgeting process is to help the management to take better
decision, the budgeting process starts from the lower stage of accounting team, members of the
team that are in charge to register the main accounting documents like invoices, recipes from
small businesses and sales invoices. The activity of the accounting team is to maintain the correct
data of stocks, as this is received from the provider and selling status of the merchandise sold to
customers, another important activity is to record the invoices based of budgeting determined by
the management and the needs of each cost center. Another attribution of management is to keep
costs at minimum so the profit to grow and bring more prosperity to the partners and owners of
the business.
The limitations of financial accounting have made the management to realize the
importance of cost accounting. Whatever may be the type of business, it involves expenditure on
labor, materials and other items required for manufacturing and disposing of the product. The
management must avoid the possibility of waste at each stage. It has to ensure that no machine
remains idle, efficient labor gets due incentive, byproducts are properly utilized, and costs are
properly ascertained. Besides the management, the creditors and employees are also benefited in
numerous ways by installation of a good costing system. Cost accounting increases the overall
productivity of an organization and serves as an important tool, in bringing prosperity to the
nation.

Activity based costing help managers in decision making. However, activity-based

costing has certain limitations or disadvantages which as are under:
1. Implementing a system requires substantial resources, which is costly to maintain.
2. Activity Based Costing is a complex system which need lot of record for calculations.
3. In small organization mangers are accustomed to use traditional costing systems to run their
operations and traditional costing systems are often used in performance evaluations.
4. Activity based costing data can be easily misinterpreted and must be used with care when used
in decision making. Managers must identify which costs are relevant for the decisions at hand.

The costs are classified on different types that can bring close to the point where the
business is profitable and in expansion, those costs are spread in few essential domain’s like:
Costs Based on Behavior, Costs Based on Function, Costs Based on Nature. The cost can be
calculated thru different methods to reach the right price for the job that employees supposed to
provide their attributions to earn the payment that is agreed in the contract with the employer.

Costs Based on Behavior: There are four types of costs based on the behavior of the costs.
Variable Cost, Fixed Cost, Step Cost and Semi-Variable Cost.

Variable costs are the costs that change as the production level change. Variable cost increases if
the production level increases and variable cost decreases if the production level decreases. The
per unit variable cost is constant but in total it increases as the production level increases

(Baggott,2013).

According to the given information, the variable costs are classified as follows:
a) Direct Material
b) Direct Labor
c) Maintenance
d) Direct Expenses

Fixed costs are the costs that remain constant or fixed within a relevant range whether the
production level increases or decreases. The total fixed cost is fixed and per unit fixed cost is
variable. The per unit fixed cost decreases as the number of units produced increases.
 Source: (Foster and Gupta, 2012)

Costs Based on Function: Costs of an organization can also be classified based on the relevant
function of an organization. Such as Production Cost, Administrative Cost, Selling and
Distribution Cost and so on (Foster and Gupta, 2012).
Production costs incurred in the process of converting the raw materials into finished goods.
Following costs are the production cost based on the given information:
a) Direct Material
b) Direct Labor
c) Direct Expenses

Administrative costs are the costs that incurred while maintaining the day to day administrative
activities. Following costs are the administrative cost according to the information given:
a) Rent and Rates
b) Depreciation
c) Maintenance
d) Telephone
e) Purchase of Computers
f) Insurance

Selling and Distribution cost incurred while finished goods are delivered to the consumers and
while after sales services are provided. Following costs are the example of selling and
distribution
cost.
a) Purchase of Van
b) Telephone
Costs Based on Nature: The costs of an organization can be classified as a direct cost and
indirect
cost. These two categories can further be classified into different categories.

Direct costs are those costs that can be directly traced to the appropriate unit for which the cost
has
incurred. Following costs is the example of direct cost based on the given information:
a) Direct Materials
b) Direct Labor
c) Direct Expenses
The management can use different costing methods such as job costing, batch costing, process
costing, contract costing.

Job Costing: Job costing is a costing method where the cost is allocated to the specific job or
product separately. The management of ABC company can use this method for the costing of
special and separately identifiable product.
Batch Costing: It is a costing method where the cost is allocated to the group of similar
products.
It is like the job costing. The difference is that here cost is allocated to a group of similar
products instead of singular product. The management can use this method to allocate cost
among
a group of similar products.
Process Costing: In this costing method, the cost is allocated to a bunch of products that go
through same processing procedures. Each process is differently identified, and the cost is
allocated
based on the total cost and total output from that department. The management of the company
can use this method for the costing of regular products (Baggott, 2013).
Contract Costing: It is a costing method for a special contract that is cost structure is adjusted
with changes in the contract. The management can use this method for the costing of special
contract. This is like batch costing.
Service Costing: It is a costing method for the allocation of costs that are incurred by providing

Master Budget: Master budget summarizes overall activities of an organization by estimating

the
main functions and activities of an organization such as Revenue Budget, Purchase Budget,
Operating Budget and Cash Budget. The company can use this budget to get a summarize idea
about the core activities of the company and goals and objectives for different departments and
how they will be achieved (Horngren et al., 2011).
A company can use different budgeting
methods to serve a different purpose to prepare budgets for the company such as Mater Budget,
Flexible Budget, Zero Based Budget, Incremental Budget.

Master Budget: Master budget summarizes overall activities of an organization by estimating

the
main functions and activities of an organization such as Revenue Budget, Purchase Budget,
Operating Budget and Cash Budget. The company can use this budget to get a summarize idea
about the core activities of the company and goals and objectives for different departments and
how they will be achieved (Horngren et al., 2011).

Most of the activities of the company are showing unfavorable performances because of the
limitation of the master budget. The master budget does not adjust activity level with the
standard
cost, as a result, most of the performances show unfavorable result even if the actual result is
favorable considering the activity level.
The better control management has on each process to reach at the best results an to bring
improvements to the business is essential to calculate each indicator to keep it at the best
performance and rise the profit for the company.

Baggott, J. (2013). Cost and management accounting. 12th ed. Oxford: Made Simple Books.
Horngren, C., Datar, S., Rajan, M., Beaubien, L. and Graham, C. (2011). Cost accounting. 11th
ed.
Foster, G. and Gupta, M. (2012). Marketing, cost management and management accounting.
11th
ed. Arlington, Tex.: CAM-I.