Qualification Module Number and Title

HD in Business Management SRI4154: Accounting & Costing

Student Name & No. Assessor
Kavindya Priyadarshani
Hand out date Submission Date
2023.07.02 2023.09.01
Assessment type Duration/Length of Weighting of Assessment
Assessment Type
WRIT01 1500 words 50%

Assignment Cover Sheet

Lerner Declaration

I certify that the work submitted for this assignment is my own and research sources are
fully acknowledged.
Signature: Date:

Marks Awarded

First Assessor

IV marks

Agreed grade

Signature of the assessor Date:

Accounting & costing

FEEDBACK FORM

INTERNATIONAL COLLEGE OF
BUSINESS & TECHNOLOGY

Module : SRI4154 Accounting & Costing

Student :

Assessor :

Assignment :

Strong features of your work:

Areas for improvement:

Marks Awarded:

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Accounting & costing

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Accounting & costing

ACKNOWLEDGEMENT

I would like to express my sincere gratitude to my lecturer Mr. Tharindu Karunarathne for her
invaluable guidance and support throughout completion of my assignment. Her expertise and
encouragement helped me to complete this assignment successfully.

I’m grateful for all the other lecturers for all the resources and support they provided.

I would also like to thank my friends and family for their love and support during this
process. Without them, this journey would not have been possible.

Finally, I would like to thank all of the participants in my study for their time and willingness
to share their experiences. This work would not have been possible without their contribution .

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Accounting & costing

INTRODUCTION

Costs are simply the resources or money involved in transactions. Businesses without proper
costing methods often spiral out of control.

If you have information that tells you about the costs incurred at different levels of business,
you need to factor those costs into your calculations. The results of these calculations create
accountability that provides external and internal stakeholders with reliable information about
the progress and performance of the company. Cost calculation methods differ depending on
the characteristics of the company and the country in which the company is located. Costing
methods can be broadly divided into partial costing and full costing. These approaches are
complementary, not mutually exclusive.

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Executive Summery

The food and beverage company plans to launch an herbal drink with a new cost-based
strategy. While overheads such as factory rent, electricity and machine maintenance are
considered indirect costs, direct costs consist of labor, packaging and raw materials. Direct
and indirect costs related to the preparation of the herbal drink are included in the production
costs. Administrative, selling, marketing and research and development expenses are other
than production expenses. Fixed costs are fixed and directly depend on the production
volume. Manufacturing overhead included in absorption costing is both variable and fixed,
which affects net profit.

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Table of Contents
Task 01..........................................................................................................................................................
Task 02........................................................................................................................................................
2.1. Income Statement - March 2021....................................................................................................
2.1.1. Marginal Costing Method..........................................................................................................
2.1.2. Absorption Costing Method.......................................................................................................
2.2. Marginal Costing vs Absorption Costing......................................................................................
Task 03........................................................................................................................................................
3.1. Zero-Based Budgeting....................................................................................................................
3.2. Budgeting.........................................................................................................................................
3.2.1. Budgeting Techniques................................................................................................................
3.2.2. Budget Committee Meeting.......................................................................................................
Task 04........................................................................................................................................................
4.1. Variances..........................................................................................................................................
4.2. Summary of Total Cost Variances.................................................................................................
4.3. Possible Causes and Corrective Actions for Adverse Variances.................................................
Conclusion…………………………………………………………………………………………….19
References…………………………………………………………………………………………….20

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Task 01
Our top food and beverage manufacturer has exciting potential with the projected launch of a
new herbal beverage, according to the product development team. I will offer a thorough cost
categorization for this proposed product as the management accountant to support strategic
choice-making.

Direct Costs

These include expenses for labor, packaging, and raw materials that are directly related to
production. Direct expenses include things like the cost of the herbs used in the product, the
salary paid to the employees on the assembly line, and the cost of the customized packaging.

Indirect Costs

Unrelated charges that are necessary for the running of the industrial process are known as
indirect costs. These expenses include overhead expenditures such as rent for the plant,
utilities, and machinery upkeep. Regardless of production volume, indirect expenses are
incurred and distributed among several goods or activities. Indirect expenses include things
like the power required in the manufacturing facility and the cost of maintaining the
production machinery.

Manufacturing Costs

Manufacturing expenses include all direct and indirect expenses related to producing the
herbal beverage. These expenses cover both the direct costs of the materials and labor used in
the production process as well as the indirect costs associated with running the manufacturing
facility. The entire costs involved with producing anything can be estimated from
manufacturing costs.

Non-Manufacturing Costs

Non-manufacturing expenditures are expenses that are necessary for basic business
operations but do not directly contribute to the development of the herbal beverage. These
expenses include administrative, sales, and marketing fees, as well as R&D expenses. Non-
manufacturing expenses are required for the promotion of a new product, ensuring
compliance, and maintaining successful business operations.

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Fixed Costs

Fixed costs are expenses that don't change based on the volume of output. These expenses
cover things like rent, the wages of permanent employees, and depreciation of equipment.
Whether or whether the herbal drinking product is created, fixed expenses are incurred. These
expenses are essential to consider when setting prices even if the teams responsible for
product development and marketing have no immediate control over them.

Variable Costs

Variable costs fluctuate proportionately with changes in production volume. These charges
include raw materials, direct labor costs, and production-related expenses that vary with the
number of units produced. knowledge of how variations in production levels affect total costs
and profitability requires a knowledge of variable costs.

Task 02

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2.1. Income Statement - March 2021

2.1.1. Marginal Costing Method

Particulars Amount (Rs.)

Sales 20,000
Cost

- DM 3,200
- DL 2,000
- Variable Production Overheads 1,500

TVC 6,700
CM 13,300
FC
FPO 4,000
- FS Expenses 4,000
- FA Expenses 2,000
Total Fixed Costs 10,000
Net Profit 3,300

2.1.2. Absorption Costing Method

Particulars Amount (Rs.)

Sales 20,000.00
Cost
- Opening Inventory (0 units) -
- DM (3,200.00)
- DL (2,000.00)
- VPO (1,500.00)
TVC 6,700.00
Fixed Production Overheads (4,000.00)
Total Costs 10,700.00
Gross Profit 9,300.00
Selling Expenses:
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- Fixed Selling Expenses (4,000.00)

- Variable Sales Commission (1,000.00)
Total Selling Expenses 5,000.00
Net Profit 4,300.00

2.2. Marginal Costing vs Absorption Costing

Marginal Costing

 When computing the cost of products sold, marginal costing includes only variable
expenses (direct materials, direct labor, and variable manufacturing overheads).
 Fixed production overheads are handled as period expenses rather than product costs.
 Fixed costs are classified as independent expenses on the income statement and are
subtracted directly from the contribution margin to calculate net profit.

Absorption Costing

 In the cost of goods sold, absorption costing comprises both variable and fixed
manufacturing overheads.
 Fixed production overheads are spread across units produced, raising the cost per unit
and lowering the gross profit.
 The net profit is calculated by adding fixed selling expenditures, variable sales
commission, and other charges to the gross profit.
 This technique provides a more thorough perspective of product costs, but it is
susceptible to variations in production levels.

Task 03
3.1. Zero-Based Budgeting
Despite its time-consuming nature, the notion that zero-based budgeting (ZBB) is the best
budgeting strategy is controversial. Every planned cost must be justified from the beginning,

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regardless of whether it was incurred in the prior quarter. While this strategy encourages cost-
consciousness and can result in effective resource allocation, its suitability is dependent on
the unique organizational environment and goals.

ZBB supporters believe that its rigorous expenditure review compels departments to
rigorously analyze their needs, perhaps revealing redundancies and wasteful processes. This
can lead to better resource allocation and the removal of non-essential expenses, resulting in
enhanced operational efficiency. However, its time-consuming nature presents difficulties.
ZBB requires managers to devote significant time and effort to justifying each spending in
detail. This might divert attention away from strategic planning and implementation in
businesses with limited resources or those focused on short-term goals.

Finally, while zero-based budgeting can promote cost-consciousness and resource efficiency,
its suitability is dependent on criteria such as organizational goals, industry features, and
available resources. While it might be the most appropriate method in some cases, a blanket
statement proclaiming its superiority must be considered in the context of individual
organizations.

3.2. Budgeting

3.2.1. Budgeting Techniques

Sales Budget

Produc Selling Total Sales

Units Sold
t Price (Rs.) (Rs.)
Venus 8500 400 3,400,000
Texas 1600 560 896,000

Production Budge

Units Desired
Total Units Units to
Product Needed for Ending
Required Produce
Sales Inventory

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Venus 8500 170 8670 8650

Texas 1600 90 1690 1600

Material Purchase Budget

Material Total Ending

Materia Beginning
Required per Material Inventory Material to
l Inventory Purchase
Unit Required Required
Materia 86,50 8,500.0 10,200.0 87,700.0
10 units
l1 0 0 0 0
Materia 14,49 8,000.0 1,700.0 14,090.0
9 units
l2 0 0 0 0

Direct labor Budge

Direct Labor Total Direct Direct Labor

Product Hours per
Labor Hours Cost (Rs.)
Unit

86,500.0 1,038,000.0
Venus 10 hours
0 0
24,000.0 288,000.0
Texas 15 hours
0 0

Cash Budget

Receipts Payments Other

Payments Cash
from for Costs and Net Cash
Quarter for Wages Balance
Customers Materials Expenses Flow (Rs.)
(Rs.) (Rs.)
(Rs.) (Rs.) (Rs.)
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Q1 1,000,000 400,000 400,000 120,000 80,000 118,000

Q2 1,200,000 480,000 440,000 100,000 180,000 298,000
Q3 1,120,000 440,000 480,000 72,016 127,984 426,984
Q4 985,000 547,984 646,188 13,642 -222,814 204,170

3.2.2. Budget Committee Meeting

The company's predicted performance would most likely be reviewed during the budget
committee meeting based on the budgeted and actual data supplied. Variations in direct
material costs, labor efficiency, and sales price that are favorable may suggest efficient
resource usage and effective pricing strategies. Negative variations in labor rates, variable
overheads, and sales volume, on the other hand, may create worries about cost management,
worker productivity, and market demand. The committee would investigate these
discrepancies and assess the company's capacity to adjust to changing conditions. Overall, the
company's performance discussion would be on lowering costs, improving operational
efficiency, and aligning plans to meet financial targets.

Task 04
4.1. Variances
Direct Material Variances:

a. Direct Material Cost Variance:

= 74,000 kg * (Rs. 11.20 - Rs. 10.80)

= Rs. 29,600 (Favorable)

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b. Direct Material Usage Variance:

= Rs. 10.80 * (8,000 kg - 74,000 kg)

= Rs. 6,480 (Adverse)

Direct Labor Variances:

a. Direct Labor Rate Variance:

= 10,800 hours * (Rs. 19.00 - Rs. 18.00)

= Rs. 10,800 (Adverse)’

b. Direct Labor Efficiency Variance:

= Rs. 18.00 * (10,000 hours - 10,800 hours)

= Rs. 14,400 (Favorable)

Variable Overhead Variances:

a. Variable Overhead Expenditure Variance:

= Rs. 70,000 - (10,800 hours * Rs. 6.00)

= Rs. 4,800 (Adverse)

b. Variable Overhead Efficiency Variance:

= Rs. 6.00 * (10,000 hours - 10,800 hours)

= Rs. 4,800 (Favorable)

Fixed Overhead Variances:

a. Fixed Overhead Expenditure Variance:

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= Rs. 170,000 - Rs. 168,000

= Rs. 2,000 (Favorable)

Sales Variances:

a. Sales Price Variance:

= 9,000 units * (Rs. 184 - Rs. 180)

= Rs. 36,000 (Favorable)

b. Sales Volume Variance:

= 10,000 units * (Rs. 180 - Rs. 116)

= Rs. 640,000 (Adverse)

4.2. Summary of Total Cost Variances

Summary of Total Cost and Sales Variances:

Total Direct Material Variance:

= Rs. 29,600 (Favorable) - Rs. 6,480 (Adverse)

= Rs. 23,120 (Favorable)

Total Direct Labor Variance:

= Rs. 10,800 (Adverse) + Rs. 14,400 (Favorable)

= Rs. 3,600 (Favorable)

Total Variable Overhead Variance:

= Rs. 4,800 (Adverse) - Rs. 4,800 (Favorable)

= Rs. 0 (Net Variance)

Total Fixed Overhead Variance:

= Rs. 2,000 (Favorable) + Unknown (Efficiency Variance not given)

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Total Sales Variance:

= Rs. 36,000 (Favorable) - Rs. 640,000 (Adverse)

= Rs. 604,000 (Adverse)

4.3. Possible Causes and Corrective Actions for Adverse Variances

Direct material usage variation

o Possible causes include inefficient material use, inadequate quality control, and
imprecise measurements.
 Corrective Actions: strengthen staff training, strengthen quality control methods, and
constantly monitor material utilization.

Variation in Direct Labor Rates:

o Possible causes include wage rate fluctuations, skill mismatches, and inefficient labor
allocation.
 Corrective Actions: Analyze salary structure, give skill enhancement training, and
guarantee optimal worker distribution.

Variance in Variable Overhead Expenditure:

o Possible causes include an unanticipated increase in variable overhead expenses and

inadequate cost control.
 Corrective Actions: Review and limit overhead expenditures on a regular basis,
negotiate with suppliers, and look for cost-cutting options.

Variance in Fixed Overhead Expenditure:

o Possible causes include unanticipated fixed overhead expenditures and cost

management inefficiencies.
 Corrective Actions: Closely monitor fixed expenses, identify areas of overspending,
and adopt cost-cutting solutions.

Variation in Sales Volume:

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o Possible explanations include lower-than-expected demand, market rivalry, and

external reasons.
 Corrective actions include analyzing market trends, revising marketing strategy, and
diversifying product offers.

A detailed investigation of the fundamental causes is required for any remedial action.
Regular monitoring of processes, budgets, and performance can aid in the early detection of
problems. Communication and teamwork within divisions are essential for efficiently
addressing differences. As a result, resolving unfavorable variations successfully requires a
balanced strategy that considers both internal and external influences.

Conclusion

This document examines accounting, costing, and budgeting in a food and beverage
manufacturing company, emphasizing strategic decision-making, precise cost categorization,
income statement evaluation using marginal and absorption costing methods, zero-based
budgeting, and examining cost and sales variances. Comparing marginal and absorption
costing techniques shows how various approaches affect product cost allocation and
profitability. Accounting and costing are essential for comprehending a company's financial
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Accounting & costing

picture. Budgeting is necessary for efficient resource allocation and goal attainment, and
while time-consuming, zero-based budgeting encourages cost-consciousness. The
significance of performance monitoring and correcting deviations from intended results is
shown by analyzing variations in direct material and labor expenses as well as sales.

Possible reasons and solutions for negative deviations highlight the importance of ongoing
watchfulness, quality control, effective resource management, and market dynamics adaption.
In a food and beverage production firm, accounting, costing, and budgeting all work together
to help with strategic decision-making, operational effectiveness, and financial success.

References

Niazi, A., Dai, J.S., Balabani, S. and Seneviratne, L., 2006. Product cost estimation:
Technique classification and methodology review.

Eppler, M. and Helfert, M., 2004, November. A classification and analysis of data quality
costs. In International Conference on Information Quality (pp. 311-325). Cambridge: MIT.

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Tombari, F., Mattoccia, S., Di Stefano, L. and Addimanda, E., 2008, June. Classification and
evaluation of cost aggregation methods for stereo correspondence. In 2008 IEEE Conference
on Computer Vision and Pattern Recognition (pp. 1-8). IEEE.

Menon, A.K. and Williamson, R.C., 2018, January. The cost of fairness in binary
classification. In Conference on Fairness, accountability and transparency (pp. 107-118).
PMLR.

Kloock, J. and Schiller, U., 1997. Marginal costing: cost budgeting and cost variance
analysis. Management Accounting Research, 8(3), pp.299-323.

Nawaz, M., 2013. An Insight Into the Two Costing Technique: Absorption Costing and
Marginal Costing. BRAND. Broad Research in Accounting, Negotiation, and Distribution,
4(1), pp.48-61.

Allen, R. and Brinkman, P., 1983. Marginal Costing Techniques for Higher Education.

June, M., Integration of Management Accounting System at Galway Plc.

Bescherer, F., 2007. Management of early innovation phases with cost management tools:
benchmarking methods used in business.

Gitman, L.J. and Forrester Jr, J.R., 1977. A survey of capital budgeting techniques used by
major US firms. Financial management, pp.66-71.

Klammer, T., 1972. Empirical evidence of the adoption of sophisticated capital budgeting
techniques. The Journal of Business, 45(3), pp.387-397.

Brown, M.B. and Forsythe, A.B., 1974. Robust tests for the equality of variances. Journal of
the American statistical association, 69(346), pp.364-367.

Kruskal, W.H. and Wallis, W.A., 1952. Use of ranks in one-criterion variance analysis.
Journal of the American statistical Association, 47(260), pp.583-621.

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