Name Kausar Hanif

Class MBA (HRM) 3.5

2023 SPRING
Roll Number BP537992
8508 Managerial Accounting

ASSIGNMENT NO.1
Q.1
a. What are some differences between financial
and managerial accounting?
Ans.
Financial Accounting:
Financial accounting is a critical branch of accounting that encompasses the systematic
recording, summarizing, and reporting of an organization's financial transactions. It
provides stakeholders, including investors, creditors, management, and regulatory
authorities, with a clear and accurate picture of a company's financial performance and
position.

Key Components of Financial Accounting

1. Recording Transactions: Financial accountants are responsible for
documenting all financial transactions within an organization. This includes
 transactions involving revenue, expenses, assets, liabilities, and equity. The
double-entry accounting system is commonly used to ensure accuracy in
recording these transactions.
2. Summarizing Financial Data: After recording transactions,
financial accountants compile and organize the data into financial statements.
These statements typically include the balance sheet, income statement,
statement of cash flows, and statement of changes in equity. These documents
present a snapshot of the company's financial health at a given point in time and
over a specific period.
3. Financial Reporting: The financial statements generated by financial
accountants are essential for communicating the company's financial
performance and position to external users. These users include investors,
creditors, government agencies, and the general public. Financial reports must
adhere to Generally Accepted Accounting Principles (GAAP) or International
Financial Reporting Standards (IFRS), depending on the jurisdiction.

Roles and Responsibilities of Financial

Accountants
1. Data Entry and Recording: Financial accountants enter all
financial transactions into the accounting system, ensuring accuracy and
completeness.
2. Financial Analysis: They analyze financial data to identify trends, assess
the company's financial health, and make informed recommendations to
management.
3. Preparation of Financial Statements: Financial accountants
prepare financial statements, including the balance sheet, income statement, cash
flow statement, and equity statement.
4. Compliance: They ensure that financial statements comply with relevant
accounting standards and regulatory requirements.
5. Auditing: Some financial accountants are involved in the auditing process,
either internally or externally, to verify the accuracy of financial records.
6. Taxation: Financial accountants may also be responsible for calculating and
preparing tax returns, ensuring compliance with tax laws and regulations.
Importance of Financial Accounting
1. Decision-Making: Financial accounting information assists stakeholders
in making informed decisions, such as investing in a company, extending credit,
or managing the business effectively.
2. Transparency: It promotes transparency and accountability by providing
a clear view of an organization's financial performance.
3. Regulatory Compliance: Financial accounting ensures that
companies adhere to legal and regulatory requirements, maintaining the integrity
of financial markets.
4. Investor Confidence: Accurate financial reporting enhances investor
confidence, potentially attracting more investment.

In summary, financial accounting is a fundamental process that plays a pivotal role in

the functioning of businesses and the global financial system. It enables organizations to
maintain transparency, make informed decisions, and meet their financial reporting
obligations, ultimately contributing to economic stability and growth.

Managerial Accounting: Enhancing Decision-

Making
Managerial accounting, often referred to as management accounting, is a specialized field of
accounting that focuses on providing internal stakeholders, such as managers and executives, with
financial information and analysis to support decision-making, planning, and control within an
organization.

Key Components of Managerial Accounting

1. Cost Analysis: Managerial accountants analyze the costs associated with

production, operations, and various activities. This includes identifying direct and indirect
costs, variable and fixed costs, and understanding cost behavior to make informed decisions.

2. Budgeting and Forecasting: Managerial accountants are instrumental

in creating budgets and forecasts that guide an organization's financial planning. These
 budgets outline expected revenues, expenses, and resource allocation for specific time
periods.

3. Performance Measurement: Managerial accountants develop key

performance indicators (KPIs) and metrics to evaluate the efficiency and effectiveness of
various business processes and departments. These measurements help in monitoring
progress towards organizational goals.

4. Product Costing: Determining the cost of producing goods or services is crucial

for pricing decisions, product profitability analysis, and assessing the competitiveness of
products in the market.

5. Decision Support: Managerial accountants provide decision-makers with

financial data and analysis to evaluate potential investments, cost-saving initiatives, pricing
strategies, and other critical choices that impact the organization's success.

Roles and Responsibilities of Managerial

Accountants
1. Financial Analysis: They analyze financial data to provide insights into the
organization's financial performance and identify areas for improvement.

2. Budgeting and Planning: Managerial accountants help create and

manage budgets, comparing actual results with budgeted figures to identify variances and
take corrective actions.

3. Cost Management: They assist in controlling costs and optimizing resource

allocation to improve operational efficiency.

4. Strategic Planning: Managerial accountants play a role in strategic decision-

making by providing financial insights that support long-term planning and goal setting.

5. Performance Evaluation: They monitor departmental and individual

performance against established goals and benchmarks.

6. Risk Assessment: Managerial accountants assess financial risks and recommend

strategies to mitigate them.

Importance of Managerial Accounting

1. Informed Decision-Making: Managerial accounting equips managers

with the data and analysis needed to make informed decisions that enhance the
organization's performance.
 2. Resource Allocation: It helps organizations allocate resources efficiently and
identify areas where cost reduction or reallocation may be necessary.

3. Profitability Analysis: By analyzing costs and revenues at a granular level,

managerial accounting helps identify the most profitable products, services, or business lines.

4. Performance Improvement: It supports continuous improvement

efforts by identifying areas where operational processes can be optimized.

5. Alignment Strategic: Managerial accounting aligns financial goals with

strategic objectives, ensuring that financial decisions are in sync with the organization's long-
term vision.

In summary, managerial accounting is a vital tool for organizations to plan, control, and optimize
their operations. It empowers management with financial insights and analysis, enabling them to
make sound decisions, allocate resources effectively, and drive the organization toward its strategic
goals.

Differences Between Financial Accounting

and Managerial Accounting
Financial accounting and managerial accounting are two distinct branches of accounting
that serve different purposes within an organization. Here are the key differences
between the two:

1. Purpose and Audience

Financial Accounting:
• Purpose: The primary purpose of financial accounting is to provide external
stakeholders, such as investors, creditors, regulators, and the general public, with
accurate and standardized financial information about an organization's
performance and financial position.
 • Audience: External parties, including shareholders, lenders, analysts, and
government agencies, rely on financial accounting reports for investment
decisions, credit assessments, and regulatory compliance.

Managerial Accounting:
• Purpose: Managerial accounting is geared towards providing internal
management with relevant financial information and analysis to support decision-
making, planning, and control within the organization.
• Audience: The audience for managerial accounting information consists of
internal stakeholders, such as managers, executives, department heads, and
employees responsible for planning, monitoring, and improving organizational
performance.

2. Timeframe

Financial Accounting:
• Time Horizon: Financial accounting focuses on reporting historical
financial data over specific periods, typically quarterly and annually.
• Reporting Standards: Financial accounting reports must adhere to
Generally Accepted Accounting Principles (GAAP) or International Financial
Reporting Standards (IFRS) to ensure consistency and comparability across
organizations.

Managerial Accounting:
• Time Horizon: Managerial accounting emphasizes forecasting and
planning for the future. It provides real-time or frequent updates on financial
performance to assist with short-term and long-term decision-making.
• Flexibility: Managerial accounting reports can be tailored to meet the
specific needs of management and can vary in format and frequency.
3. Level of Detail

Financial Accounting:
• Level of Detail: Financial accounting reports are prepared at a high level
of aggregation and follow strict accounting standards. They provide an overall
view of the organization's financial performance and position.
• External Verification: Financial accounting reports are subject to
external audit to ensure accuracy and compliance with accounting standards.

Managerial Accounting:
• Level of Detail: Managerial accounting reports provide detailed, granular
information about the organization's operations, costs, and performance by
department, product, project, or activity.
• Internal Focus: These reports are not subject to external audit and can
be customized to address specific management needs and objectives.

4. Regulatory Requirements

Financial Accounting:
• Regulation: Financial accounting is subject to extensive regulatory
oversight to ensure the integrity and transparency of financial reporting.
• Standardization: It relies on standardized financial statements, such as
balance sheets, income statements, and cash flow statements, to communicate
financial information.

Managerial Accounting:
 • Regulation: Managerial accounting is not subject to external regulatory
requirements, and organizations have more flexibility in designing their internal
reporting systems.
• Customization: Reports in managerial accounting can be tailored to
meet the specific needs and priorities of an organization and its management
team.

In summary, while both financial accounting and managerial accounting involve the use
of financial data, they serve distinct purposes and cater to different audiences. Financial
accounting focuses on external reporting for stakeholders outside the organization,
while managerial accounting provides internal management with the tools and
information necessary to make informed decisions and manage day-to-day operations
effectively.

Q1.
b. What does the value-added principle mean as it
applies to managerial accounting information?
Give an example of value-added information that
may be included in managerial accounting reports
but is not shown in publicly reported financial
statements?
Ans.
Managerial accounting information.
The value-added principle, in the context of managerial accounting, refers to the idea
that businesses should strive to enhance the overall value of their products or services at
each stage of the production or service delivery process. This principle emphasizes the
importance of identifying and adding value to the goods or services a company
provides to its customers. In essence, it encourages businesses to focus on activities and
processes that contribute positively to the perceived quality and usefulness of their
offerings.

Here's what the value-added principle means as it applies to managerial accounting

information:

1. Identifying Value-Adding Activities:

Managerial accountants use cost analysis and process evaluation to identify
which activities within the production or service delivery process add value and
which do not. Value-added activities are those that directly contribute to
improving the product or service and are valued by customers.
2. Cost Reduction: By recognizing non-value-added activities or processes
that consume resources without enhancing the product or service, managerial
accountants can target areas for cost reduction or elimination. This helps in
improving the efficiency of operations.
3. Resource Allocation: The value-added principle assists in making
informed decisions about resource allocation. Companies can prioritize
investments in areas that contribute the most to adding value to their products
or services.
4. Quality Improvement: Focusing on value-added activities often
leads to improved product or service quality. When resources are directed toward
enhancing features that customers value, it can result in increased customer
satisfaction and loyalty.
5. Competitive Advantage: Companies that consistently apply the
value-added principle are more likely to gain a competitive advantage in the
market. Their products or services are perceived as better value for money, which
can attract more customers.
6. Continuous Improvement: The value-added principle aligns with
the concept of continuous improvement (often associated with methodologies
like Lean and Six Sigma). It encourages companies to regularly review and refine
their processes to increase efficiency and value delivery.

In summary, the value-added principle in managerial accounting emphasizes the

importance of creating value for customers by focusing on activities and processes that
enhance the quality, efficiency, and desirability of products or services. By identifying
and eliminating waste, improving operations, and aligning resources with value-adding
activities, companies can become more competitive and better meet the needs of their
customers.

Value-Added Information in Managerial

Accounting Reports

Description:
Managerial accounting reports provide internal management with detailed insights and
information that are crucial for making informed decisions and improving the efficiency
and effectiveness of an organization's operations. Unlike publicly reported financial
statements, which are primarily focused on external stakeholders, managerial
accounting reports contain specific data and analysis that are not typically disclosed to
the public. One example of value-added information found in managerial accounting
reports but not in publicly reported financial statements is "Cost of Quality."

Cost of Quality (COQ) in Managerial

Accounting Reports:

Explanation:

Cost of Quality (COQ) is a comprehensive measurement that

encompasses the costs associated with ensuring the quality of products or services
within an organization. It is a valuable metric for assessing and improving the quality
management processes within a company. COQ is typically divided into two main
categories:

1. Prevention Costs: These are costs incurred to prevent defects or quality

issues from occurring in the first place. They include activities like employee
training, process improvement, quality control procedures, and the
implementation of quality management systems.
 2. Appraisal Costs: Appraisal costs are incurred to assess the quality of
products or services. This includes activities such as inspections, testing, quality
audits, and the maintenance of inspection equipment.

In managerial accounting reports, the Cost of Quality is often broken down further into
subcategories to pinpoint specific areas where quality-related costs are incurred. These
subcategories may include:

• Internal Failure Costs: Costs associated with defects or quality issues

discovered within the organization before they reach the customer. This includes
rework, scrap, and downtime due to quality problems.
• External Failure Costs: Costs incurred when defects or quality issues
are discovered after the product or service has reached the customer. This
includes warranty claims, customer returns, and product recalls.

Why it's Value-Added Information:

The Cost of Quality is a valuable piece of information for internal management because
it helps identify areas where quality-related expenditures are being incurred. By
analyzing COQ data, management can take specific actions to reduce costs associated
with poor quality, enhance product or service quality, and improve overall operational
efficiency. This information is not typically disclosed in publicly reported financial
statements because it is primarily intended for internal decision-making and process
improvement purposes.

In summary, the Cost of Quality is a prime example of value-added information found in

managerial accounting reports but not in publicly reported financial statements. It
empowers management to make data-driven decisions aimed at enhancing product or
service quality, reducing costs, and improving the organization's overall
competitiveness.
Q2.
a. Because of seasonal fluctuations, Norel Corrporation has a
problem determining the unit cost of the products it produces.
For example, high heating costs during the winter months
causes per-unit cost to be higher then per-unit cost in the
summer months even when the same number of units of
products is produced.
Suggest several ways that Norel can improve the computation
of per-unit cost?

Ans.
a.

Managing Seasonal Fluctuations in Unit

Costs at Norel Corporation

Description:
Norel Corporation faces a recurring challenge related to the determination of unit costs
for its products due to significant seasonal fluctuations. These fluctuations have a
notable impact on the per-unit cost of production, with costs typically surging during
the winter months compared to the lower per-unit costs experienced in the summer
months, despite consistent production volumes. This scenario poses various operational
and financial considerations for the company.

Key Factors Contributing to Seasonal Unit

Cost Fluctuations:
 1. Heating Costs: One of the primary drivers of higher unit costs during the
winter months is the increased expenditure on heating. Cold weather necessitates
the use of heating systems to maintain optimal working conditions in production
facilities, which substantially raises energy costs.
2. Utility Costs: Beyond heating, other utility expenses, such as electricity
and water, may also spike during the winter months. These increased costs are
often attributed to heightened energy demands and, in some cases, seasonal rate
adjustments by utility providers.
3. Production Efficiency: Seasonal changes can affect production
efficiency. For instance, extreme weather conditions might result in equipment
slowdowns, increased downtime, or supply chain disruptions, all of which can
impact production costs per unit.
4. Inventory Holding Costs: Seasonal fluctuations may require Norel
Corporation to adjust inventory levels. Higher winter costs may be linked to
increased storage expenses and holding costs associated with maintaining larger
inventories to meet peak seasonal demand.

Challenges Faced by Norel Corporation:

1. Costing Accuracy: Fluctuating unit costs pose challenges in accurately
determining the true cost of production. This can impact pricing decisions,
profitability analysis, and budgeting.
2. Financial Planning: The company's financial planning and forecasting
become more complex due to the variability in unit costs. It becomes crucial to
account for seasonality when projecting cash flows and budgets.
3. Competitive Pricing: Determining competitive pricing strategies can
be challenging when unit costs vary significantly throughout the year. Norel
Corporation must strike a balance between pricing competitively and maintaining
profitability.

Strategies for Managing Seasonal Unit Cost

Fluctuations:
 1. Cost Allocation: Implement cost allocation methods that evenly
distribute seasonal expenses across all production units, allowing for more stable
per-unit cost figures.
2. Seasonal Budgeting: Develop separate seasonal budgets to account
for varying costs. This approach enables the company to plan and allocate
resources more effectively during high-cost periods.
3. Energy Efficiency: Invest in energy-efficient technologies and practices
to reduce heating and utility costs during the winter months.
4. Inventory Management: Optimize inventory management by
aligning stock levels with anticipated demand to minimize holding costs.
5. Pricing Strategies: Consider dynamic pricing strategies that account
for seasonal fluctuations in costs while remaining competitive in the market.
6. Operational Flexibility: Build operational flexibility into production
processes to adapt to seasonal variations more efficiently, potentially reducing
downtime and waste.

In conclusion, Norel Corporation's challenge of managing seasonal fluctuations in unit

costs highlights the importance of robust cost accounting, financial planning, and
operational flexibility. By adopting strategies that address these challenges, the
company can navigate seasonal variations more effectively and maintain its
competitiveness in the market.

Enhancing Per-Unit Cost Computation at

Norel Corporation

Description:
Norel Corporation faces challenges in accurately computing per-unit costs due to
seasonal fluctuations and variable cost drivers. To improve the accuracy of per-unit cost
calculations and make more informed decisions, the company can implement several
strategies and practices:
1. Activity-Based Costing (ABC):
• Implement an Activity-Based Costing system to allocate costs more accurately
based on the actual activities that drive costs. This approach provides a more
granular view of cost components.

2. Cost Pool Segmentation:

• Segment costs into fixed and variable categories. This allows for a clearer
distinction between costs that remain constant regardless of production levels
(fixed costs) and those that vary with production volume (variable costs).

3. Historical Averaging:
• Use historical data to calculate an average cost per unit over multiple seasons. A
multi-year average can help smooth out seasonal fluctuations and provide a
more stable cost figure for planning purposes.

4. Standard Costing:
• Develop standard cost estimates for different seasons or production scenarios.
This involves setting predetermined costs for materials, labor, and overhead,
which can be compared to actual costs to identify variances and make
adjustments.

5. Cost Tracking by Season:

• Maintain detailed cost records by season, tracking all expenses related to heating,
utilities, labor, and other seasonal factors separately. This enables a more precise
understanding of cost fluctuations.

6. Cost Segmentation by Product Line:

• Analyze costs on a product line basis. Understand how different product lines or
SKUs are affected by seasonal variations. This can inform pricing and production
decisions.
7. Cost Benchmarking:
• Compare per-unit costs with industry benchmarks and competitors to identify
areas where Norel may be less efficient. Benchmarking can highlight
opportunities for cost reduction.

8. Lean Manufacturing Principles:

• Adopt lean manufacturing practices to reduce waste, improve efficiency, and
lower production costs. Lean principles can help mitigate the impact of
seasonality on unit costs.

9. Energy-Efficient Technologies:
• Invest in energy-efficient equipment and technologies to reduce heating and
utility costs during peak seasons. Energy-saving initiatives can have a significant
impact on per-unit costs.

10. Advanced Costing Software: - Implement advanced costing

software that can handle seasonal fluctuations and provide real-time cost analysis. Such
software can help automate cost calculations and provide timely insights.

11. Rolling Forecasts: - Develop rolling forecasts that take into account
changing cost dynamics and seasonal patterns. These forecasts should be regularly
updated to reflect the most recent data.

12. Cost-Volume-Profit Analysis: - Use cost-volume-profit (CVP)

analysis to understand how changes in production volume affect per-unit costs. This can
assist in optimizing production levels based on cost considerations.

13. Cross-Functional Collaboration: - Encourage collaboration

between finance, operations, and production teams to ensure a comprehensive
understanding of cost drivers and to develop strategies for cost control.
14. Continuous Improvement Culture: - Foster a culture of
continuous improvement within the organization. Encourage employees to identify and
implement cost-saving initiatives.

15. Seasonal Budget Adjustments: - Revise budgets and financial

plans regularly to accommodate seasonal cost variations. Ensure that budgets are
flexible enough to adapt to changing conditions.

By implementing these strategies, Norel Corporation can enhance the computation of

per-unit costs, allowing for more accurate cost analysis, better decision-making, and
improved competitiveness in the face of seasonal fluctuations.

b.
Omar Corrporation paid one of its sales
representatives. Rs 4,300 during the months of
March .The rep is paid a base salery plus Rs. 15
per unit of products sold. During March, the rep
sold 200 units.
Required
Calculate the total monthly cost of the sales
representatives salary for each the following
months:
Month
April May June July
Number of units sold
240 150 250 160
Total variables cost
Total fixed cost
Total salary cost

Ans.
Calculating the Total Monthly Salary Cost
for the Sales Representative
In this scenario, the sales representative is paid a base salary plus a variable commission
based on the number of units sold. Let's calculate the total monthly salary cost for the
sales representative for each of the following months: April, May, June, and July.

1. Total Variable Cost: The variable cost is based on the commission of Rs.
15 per unit of products sold. To calculate the variable cost for each month, multiply the
number of units sold by the commission rate.

• April: 240 units sold * Rs. 15 per unit = Rs. 3,600

• May: 150 units sold * Rs. 15 per unit = Rs. 2,250
• June: 250 units sold * Rs. 15 per unit = Rs. 3,750
• July: 160 units sold * Rs. 15 per unit = Rs. 2,400
2. Total Fixed Cost: The fixed cost is the base salary paid to the sales
representative. Since the base salary is Rs. 4,300 per month, the fixed cost remains the
same for each month.

• Fixed Cost for April: Rs. 4,300

• Fixed Cost for May: Rs. 4,300
• Fixed Cost for June: Rs. 4,300
• Fixed Cost for July: Rs. 4,300

3. Total Salary Cost: The total monthly salary cost for the sales
representative is the sum of the variable cost (commission) and the fixed cost (base
salary). Add the variable and fixed costs for each month to calculate the total salary cost.

• Total Salary Cost for April: Rs. 3,600 (Variable) + Rs. 4,300 (Fixed) = Rs. 7,900
• Total Salary Cost for May: Rs. 2,250 (Variable) + Rs. 4,300 (Fixed) = Rs. 6,550
• Total Salary Cost for June: Rs. 3,750 (Variable) + Rs. 4,300 (Fixed) = Rs. 8,050
• Total Salary Cost for July: Rs. 2,400 (Variable) + Rs. 4,300 (Fixed) = Rs. 6,700

Summary:
• In April, the total monthly salary cost for the sales representative is Rs. 7,900.
• In May, the total monthly salary cost for the sales representative is Rs. 6,550.
• In June, the total monthly salary cost for the sales representative is Rs. 8,050.
• In July, the total monthly salary cost for the sales representative is Rs. 6,700.

These calculations provide a breakdown of the sales representative's salary cost for each
of the specified months, taking into account both the fixed base salary and the variable
commission based on the number of units sold.
Q3 .
a.
What is a master budget ? What is the normal
starting point in developing the master budget?
Ans.

Master Budget: A Comprehensive Financial

Plan
A master budget is a critical financial planning tool used by organizations to manage
their resources, set financial goals, and guide decision-making. It serves as a
comprehensive, integrated financial plan that outlines an organization's projected
income, expenses, and cash flow for a specific period, typically a fiscal year. Developing
a master budget is a meticulous process that involves various sub-budgets and requires
a deep understanding of an organization's operations and financial goals.

The Normal Starting Point in Developing the

Master Budget
The process of creating a master budget typically begins with a foundational step,
setting the stage for the entire budgeting process. This starting point is known as the
"Sales Budget."
1. Sales Budget: The Foundation of the
Master Budget
The sales budget is the cornerstone of the master budget because it lays the
groundwork for all other budgets and financial projections. Here's a detailed
explanation of this critical starting point:

1.1 Sales Forecasting: The first step in developing the sales budget is to
make accurate sales forecasts. Organizations must rely on historical data, market
research, industry trends, and sales team inputs to estimate future sales volumes and
revenue. These forecasts serve as the basis for the entire budgeting process.

1.2 Setting Sales Goals: Once sales forecasts are determined, organizations
set sales goals for the upcoming period. These goals should align with the company's
strategic objectives and growth targets. Sales goals are typically expressed in terms of
revenue, units sold, or market share.

1.3 Pricing Strategy: Decisions regarding pricing strategy are crucial in the
sales budget. Organizations must consider factors such as competitive pricing, customer
demand, and profit margins when determining the pricing for their products or services.

1.4 Sales Channels: Organizations should also specify the distribution

channels through which they plan to sell their products or services. This can include
direct sales, online sales, retail partners, or wholesalers.

1.5 Sales Budget Calculation: With the sales forecasts, goals, pricing
strategy, and distribution channels in place, the sales budget is calculated by multiplying
the projected sales volume by the expected selling price. This results in the budgeted
sales revenue.

2. Connecting the Dots: Subsequent Budgets

Once the sales budget is established, it serves as the starting point for the development
of other sub-budgets and components of the master budget:
2.1 Production Budget: The production budget is directly tied to the sales
budget. It determines how much of each product needs to be manufactured or
procured to meet the forecasted sales demand.

2.2 Operating Budgets: Various operating budgets, including the

marketing budget, research and development budget, and administrative budget, are
aligned with the sales budget. These budgets allocate resources and expenses to
support sales and overall company operations.

2.3 Cash Budget: The cash budget, which forecasts cash inflows and outflows,
relies heavily on the sales budget to predict when revenue will be received and when
expenses will be incurred.

2.4 Capital Expenditure Budget: Investment decisions for equipment,

facilities, or technology upgrades often depend on the sales forecast and revenue
projections outlined in the sales budget.

2.5 Budgeted Income Statement and Balance Sheet: The

sales budget is integral to the creation of the budgeted income statement and balance
sheet, which provide a comprehensive overview of the company's financial performance
and position.

In summary, a master budget is a comprehensive financial plan that guides an

organization's financial activities. The normal starting point in developing the master
budget is the sales budget, as it sets the foundation for all other budgets and financial
projections. Accurate sales forecasting, goal setting, pricing strategy, and distribution
channel planning are essential components of the sales budget, which, in turn,
influences production, operations, cash flow, and investment decisions throughout the
organization. By meticulously crafting a master budget, organizations can align their
financial resources with strategic objectives, monitor performance, and make informed
decisions to achieve long-term success.
b.
The marketing department of Jessi Corporation
has submitted the following sales forecast for
the upcoming fiscal year (all sales are on
account):
1st Quarter 2st Quarter 3st Quarter
4st Quarter
Budgeted unit sales ………………………. 11,000
12,000 14,000 13,000
The selling prices of the company’s product is
Rs 20,00 per unit. Management expects to
collect 70% of sales in the quarter in which the
sales are made,20% in the following quarter,
and 10% of sales are expected to be collected in
the first quarter is Rs.70,200.
The company expects to start the quarter with
1,650 units in finished goods inventory .
Manage-ment desires an ending finished goods
inventory in each quarter equal to 15% of the
next quarter budgeted sales .The desired
ending finished goods inventory for the fourth
quarter is 1,850 units.
Required:
1 .Prepare the company sales budget and
schedule of expected cash collections.
2. Prepare the company production budget for
the upcoming fiscal year.

Ans.
b.
1. Sales Budget and Schedule of Expected
Cash Collections
A sales budget outlines the expected unit sales and sales revenue for each quarter of the
upcoming fiscal year. The schedule of expected cash collections details when cash is
expected to be received from these sales. Here's how to prepare the sales budget and
cash collection schedule for Jessi Corporation:

Sales Budget:
Quarter Budgeted Unit Sales Selling Price per Unit (Rs.) Total Sales Revenue (Rs.)

1st 11,000 20.00 220,000

2nd 12,000 20.00 240,000

3rd 14,000 20.00 280,000

4th 13,000 20.00 260,000

Schedule of Expected Cash Collections:

Sales from Current Quarter Sales from Previous Quarter Total Cash Collections
Quarter (%) (%) (Rs.)

1st 70% 20% 154,000

2nd 70% 20% 168,000

 Sales from Current Quarter Sales from Previous Quarter Total Cash Collections
Quarter (%) (%) (Rs.)

3rd 70% 20% 196,000

4th 70% 10% 201,000

2. Production Budget
The production budget outlines the number of units Jessi Corporation needs to produce
each quarter to meet sales demand and maintain desired inventory levels. Here's how to
prepare the production budget:

Beginning Finished Goods Inventory:

• 1st Quarter: 1,650 units

Desired Ending Finished Goods Inventory

(15% of Next Quarter's Sales):
• 1st Quarter: 12,000 * 15% = 1,800 units
• 2nd Quarter: 14,000 * 15% = 2,100 units
• 3rd Quarter: 13,000 * 15% = 1,950 units
• 4th Quarter: 1,850 units (as specified)
Production Budget:

Budgeted Unit Beginning Total Units Ending Units to

Quarter Sales Inventory Needed Inventory Produce

1st 11,000 1,650 12,650 1,800 10,850

2nd 12,000 1,800 13,800 2,100 11,700

3rd 14,000 2,100 16,100 1,950 14,150

4th 13,000 1,950 14,950 1,850 13,100

This production budget ensures that Jessi Corporation meets its sales demand,
maintains desired inventory levels, and prepares for future quarters efficiently. It also
aligns with the sales budget and cash collection schedule to create a well-integrated
master budget for the fiscal year.
Q4.
Dawson Toys, LTD., produces a toy called the
Maze. The company has recently established a
standard cost system to help control and has
established the following standards for the
Maze toy:
Direct materials: 6 microns per toy at Rs.050
per micron
Direct labor: 1.3 hours per toy at Rs.8
per hour
During July, the company produced 3,000 Maze
toys .Production date for the month on the toy
follow:
Direct materials :25,000 microns were
purchased at a cost of Rs .0.48 per micron
5,000 of these microns were still in inventory at
the end of the month.
Direct labor: 4,000 direct labor- hours were
worked at a cost of Rs.36,000.
Required:
1.Computer the following variances for July:
a. Direct materials price and quantity
variances.
b. Direct labor rate and efficiency variances.
Prepare a brief explanation of the possible
causes of each variance.
Ans.
1. Computing Variances for July

a. Direct Materials Price and Quantity

Variances:
Direct Materials Price Variance: This variance measures the difference
between the actual cost of direct materials purchased and the standard cost per unit of
direct materials. It helps evaluate whether the company paid more or less for materials
than expected.

Direct Materials Quantity Variance: This variance measures the

difference between the actual quantity of direct materials used and the standard
quantity allowed for the actual level of production. It helps assess whether the company
used more or fewer materials than expected.

Calculations:

Direct Materials Price Variance: Standard Cost per Micron = Rs. 0.050
per micron Actual Cost per Micron = Rs. 0.48 per micron

Total Microns Purchased = 25,000 Microns in Ending Inventory = 5,000

Price Variance = (Actual Cost per Micron - Standard Cost per Micron) * Total Microns
Purchased Price Variance = (Rs. 0.48 - Rs. 0.050) * 25,000 Price Variance = Rs. 10,700
(Unfavorable)

Direct Materials Quantity Variance: Standard Microns per Toy = 6

microns per toy Actual Microns Used = (Total Microns Purchased - Microns in Ending
Inventory)

Quantity Variance = (Standard Microns per Toy - Actual Microns Used) * Actual
Production Quantity Variance = (6 - (25,000 - 5,000)) * 3,000 Quantity Variance = (6 -
20,000) * 3,000 Quantity Variance = Rs. 42,000 (Favorable)

Explanation:
• The unfavorable price variance of Rs. 10,700 suggests that the company paid
more per micron than the standard cost, possibly due to changes in the market
or supplier pricing.
• The favorable quantity variance of Rs. 42,000 indicates that the company used
fewer microns than expected, which could be attributed to efficient material
usage or reduced waste.

b. Direct Labor Rate and Efficiency Variances:

Direct Labor Rate Variance: This variance measures the difference between the actual
labor rate paid and the standard labor rate per hour. It assesses whether the company
paid more or less for labor than anticipated.
Direct Labor Efficiency Variance: This variance measures the
difference between the actual labor hours worked and the standard labor hours allowed
for the actual level of production. It evaluates whether the company used more or fewer
labor hours than expected.

Calculations:
Direct Labor Rate Variance: Standard Labor Rate per Hour = Rs. 8 per
hour Actual Labor Rate per Hour = Total Labor Cost / Total Labor Hours

Total Labor Cost = Rs. 36,000 Total Labor Hours = 4,000 hours

Rate Variance = (Actual Labor Rate per Hour - Standard Labor Rate per Hour) * Total
Labor Hours Rate Variance = (Rs. 36,000 / 4,000 - Rs. 8) * 4,000 Rate Variance = Rs. 0
(No variance)

Direct Labor Efficiency Variance: Standard Labor Hours per Toy = 1.3
hours per toy Actual Labor Hours = 4,000 hours

Efficiency Variance = (Standard Labor Hours per Toy - Actual Labor Hours) * Actual
Production Efficiency Variance = (1.3 - 4,000) * 3,000 Efficiency Variance = Rs. 11,100
(Favorable)

Explanation:
• The absence of a rate variance indicates that the company paid the expected
labor rate, with no deviation.
• The favorable efficiency variance of Rs. 11,100 suggests that the company used
fewer labor hours than anticipated to produce the Maze toys, indicating efficient
labor utilization, possibly due to improved processes or skilled labor.

In summary, the variances are evaluated to understand how actual costs and usage
compared to the standard costs and quantities. Favorable variances indicate cost
savings or efficient resource utilization, while unfavorable variances may point to higher
costs or inefficiencies in the production process.
Q5.
Green Inc. processes an one in Department 1,
out of which come three products, L., W and X.
Product L is processed further throught
Department 2. Products W is sold without
further processing .Product X is considered a
by-Product and is processed further thought
Depertment 3.Costs in Department 1 are Rs.
800,000 in total: Department 2 costs are
Rs.100,000: and Department 3 costs are
Rs.50,000. Processed 600,000 kg in Department
1 result in 50,000 kg of products L,300,000 kg of
products Wand 100,000 kg of products
X.Products L sells for Rs. 10 per kg. Products W
sells for Rs. 2 per kg Products X sells for Rs.3 per
kg .The company want to make a gross margin
of 10% of sales on products X and also allow
25%for marketing costs on product X.
Required:
 a. Calculate unit costs per kilogram for
products L, W and X, treating X as a by-
product. Use the estimated NRV method
for allocating joint costs. Deduct the
estimated NRV of the by-products
produced form the joint cost of
products L and W.
b.Calculate unit costs per kilogram for
products L, W and X, treating all three as
joint products and allocating costs by
the estimated NRV method.

Ans.
a. Unit Costs per Kilogram for Products L, W,
and X (Treating X as a By-Product)
In this approach, we will allocate joint costs to products L and W based on
their estimated Net Realizable Values (NRVs) and then deduct the NRV of by-
product X from the joint costs.

Step 1: Calculate the Joint Costs Allocation for L and W

Total Joint Costs in Department 1 = Rs. 800,000
Products L and W's NRV:

• Product L's NRV = Sales Price per Kg for L = Rs. 10 per kg

• Product W's NRV = Sales Price per Kg for W = Rs. 2 per kg

Total NRV for L and W = (50,000 kg for L + 300,000 kg for W) * (Rs. 10 per kg
+ Rs. 2 per kg) = Rs. 2,600,000

Allocation Ratio for L and W:

• Product L's Allocation Ratio = (NRV of L) / (Total NRV for L and W) = (Rs.
10 per kg) / (Rs. 2,600,000) = 1/260,000
• Product W's Allocation Ratio = (NRV of W) / (Total NRV for L and W) =
(Rs. 2 per kg) / (Rs. 2,600,000) = 1/1,300,000

Now, allocate the joint costs to L and W:

• Cost Allocated to L = (Allocation Ratio for L) * (Total Joint Costs) =

(1/260,000) * (Rs. 800,000) = Rs. 3.08 per kg
• Cost Allocated to W = (Allocation Ratio for W) * (Total Joint Costs) =
(1/1,300,000) * (Rs. 800,000) = Rs. 0.615 per kg

Step 2: Deduct NRV of By-Product X

Costs allocated to L and W need to be reduced by the NRV of by-product X.

NRV of X = Sales Price per Kg for X = Rs. 3 per kg

• Deduction from L's cost = (Cost Allocated to L) - (NRV of X) = Rs. 3.08

per kg - Rs. 3 per kg = Rs. 0.08 per kg
• Deduction from W's cost = (Cost Allocated to W) - (NRV of X) = Rs.
0.615 per kg - Rs. 3 per kg = -Rs. 2.385 per kg (Note: Negative because
X's NRV is higher than its allocated cost)

Final Unit Costs per Kilogram for L, W, and X (Treating

X as a By-Product)
 • Unit Cost for L = (Cost Allocated to L) - (Deduction from L's cost) = Rs.
3.08 per kg - Rs. 0.08 per kg = Rs. 3 per kg
• Unit Cost for W = (Cost Allocated to W) - (Deduction from W's cost) =
Rs. 0.615 per kg + Rs. 2.385 per kg = Rs. 3 per kg
• Unit Cost for X (By-Product) = NRV of X = Rs. 3 per kg

b. Unit Costs per Kilogram for Products L, W, and X

(Treating All Three as Joint Products)
In this approach, we'll allocate the joint costs to all three products (L, W, and
X) based on their estimated NRVs.

Total Joint Costs in Department 1 = Rs. 800,000

Total NRV for L, W, and X:

• NRV for L = Rs. 10 per kg

• NRV for W = Rs. 2 per kg
• NRV for X = Rs. 3 per kg

Total NRV for all three products = (50,000 kg for L + 300,000 kg for W +
100,000 kg for X) * (Rs. 10 per kg + Rs. 2 per kg + Rs. 3 per kg) = Rs. 3,500,000

Allocation Ratios for L, W, and X:

• Allocation Ratio for L = (NRV of L) / (Total NRV for all three products) =
(Rs. 10 per kg) / (Rs. 3,500,000) = 1/350,000
• Allocation Ratio for W = (NRV of W) / (Total NRV for all three products)
= (Rs. 2 per kg) / (Rs. 3,500,000) = 1/1,750,000
• Allocation Ratio for X = (NRV of X) / (Total NRV for all three products) =
(Rs. 3 per kg) / (Rs. 3,500,000) = 1/1,166,667

Now, allocate the joint costs to L, W, and X:

• Cost Allocated to L = (Allocation Ratio for L) * (Total Joint Costs) =

(1/350,000) * (Rs. 800,000) = Rs. 2.286 per kg
 • Cost Allocated to W = (Allocation Ratio for W) * (Total Joint Costs) =
(1/1,750,000) * (Rs. 800,000) = Rs. 0.457 per kg
• Cost Allocated to X = (Allocation Ratio for X) * (Total Joint Costs) =
(1/1,166,667) * (Rs. 800,000) = Rs. 0.686 per kg

Final Unit Costs per Kilogram for L, W, and X (Treating

All Three as Joint Products)
• Unit Cost for L = (Cost Allocated to L) = Rs. 2.286 per kg
• Unit Cost for W = (Cost Allocated to W) = Rs. 0.457 per kg
• Unit Cost for X = (Cost Allocated to X) = Rs. 0.686 per kg

These unit costs per kilogram for products L, W, and X are calculated using the
estimated NRV method, considering both treating X as a by-product and
treating all three as joint products. These calculations help the company make
informed decisions regarding pricing and profitability for each product.

Q 6.
The Bakery produces tea cakes. It uses a process
costing system. In March, its beginning
inventory was 450 units, which were 100
percent complete for direct materials costs and
10 percent complete for conversion costs. The
cost of beginning inventory was Rs. 655.Units
started and completed during the month
totaled 14,200. Ending inventory was 410 units,
which were 100 precent complete for direct
materials costs and 70 precent complete for
conversion costs. Costs per equivalent unit for
March were Rs 1.40 for direct materials costs
and Rs.0.80 for conversion costs.
Required:
From this information, computer the cost of
goods transferred to the Finished Goods
inventory account, and total costs to be
accounted for. Use the FIFO costing method.
Ans.
Calculating the Cost of Goods Transferred
and Total Costs Accounted for Using FIFO
Method
In a process costing system, FIFO (First-In, First-Out) method assumes that the units in
beginning inventory are completed and transferred out first, followed by the units
started and completed during the month, and then the units in ending inventory. Let's
calculate the cost of goods transferred to the Finished Goods inventory account and the
total costs accounted for using the FIFO method.

Step 1: Calculate the Cost of Beginning Inventory

The cost of beginning inventory is given as Rs. 655. Since these units were 100%
complete for direct materials and 10% complete for conversion costs, we need to
calculate the equivalent units for conversion costs first.

Equivalent Units for Conversion Costs in Beginning Inventory: = Beginning Inventory

Units * Percentage of Completion for Conversion Costs = 450 units * 10% = 45
equivalent units

Now, we can calculate the cost per equivalent unit for conversion costs:

Cost per Equivalent Unit for Conversion Costs (March) = Rs. 0.80

Cost of Beginning Inventory for Conversion Costs: = Equivalent Units for Conversion
Costs in Beginning Inventory * Cost per Equivalent Unit for Conversion Costs (March) =
45 equivalent units * Rs. 0.80 = Rs. 36

Step 2: Calculate the Cost of Units Started and

Completed During the Month
Units started and completed during the month totaled 14,200 units. We will calculate
the cost of these units based on the cost per equivalent unit for direct materials and
conversion costs for March.

Cost per Equivalent Unit for Direct Materials (March) = Rs. 1.40

Cost per Equivalent Unit for Conversion Costs (March) = Rs. 0.80

Cost of Units Started and Completed During the Month: = Total Units Completed * (Cost
per Equivalent Unit for Direct Materials + Cost per Equivalent Unit for Conversion Costs)
= 14,200 units * (Rs. 1.40 + Rs. 0.80) = 14,200 units * Rs. 2.20 = Rs. 31,320

Step 3: Calculate the Cost of Ending Inventory

Ending inventory consists of 410 units, which are 100% complete for direct materials and
70% complete for conversion costs.

Equivalent Units for Conversion Costs in Ending Inventory: = Ending Inventory Units *
Percentage of Completion for Conversion Costs = 410 units * 70% = 287 equivalent
units
Cost of Ending Inventory for Conversion Costs: = Equivalent Units for Conversion Costs
in Ending Inventory * Cost per Equivalent Unit for Conversion Costs (March) = 287
equivalent units * Rs. 0.80 = Rs. 229.60

Step 4: Calculate the Cost of Goods Transferred to

Finished Goods
The cost of goods transferred to the Finished Goods inventory account is the cost of
units completed during the month (Step 2).

Cost of Goods Transferred to Finished Goods: = Cost of Units Started and Completed
During the Month = Rs. 31,320

Step 5: Calculate the Total Costs Accounted For

The total costs accounted for include the cost of beginning inventory (Step 1), the cost
of units completed during the month (Step 2), and the cost of ending inventory (Step 3).

Total Costs Accounted For: = Cost of Beginning Inventory (Conversion Costs) + Cost of
Units Started and Completed During the Month + Cost of Ending Inventory (Conversion
Costs) = Rs. 36 + Rs. 31,320 + Rs. 229.60 = Rs. 31,585.60

So, using the FIFO costing method, the cost of goods transferred to the Finished Goods
inventory account is Rs. 31,320, and the total costs accounted for are Rs. 31,585.60.
Name Kausar Hanif
Class MBA (HRM) 3.5
2023 SPRING
Roll Number BP537992
8508 Managerial Accounting

ASSIGNMENT NO.2
Q 1.
(Presentation)
TOPICS:
2.
Describe and analyze the labour costing system
od your chosen organization, narrate its
weaknesses and suggest improvements for the
better system of labour costing.
ANS.

Labor Costing System at XYZ Manufacturing

Company

Description of the Labor Costing System:

The labor costing system at XYZ Manufacturing Company is a crucial aspect of their
overall cost management process. This system is designed to track, allocate, and control
labor-related expenses incurred during the production process. The organization
primarily employs a job-order costing system, where each product or project is treated
as a separate job, and labor costs are allocated accordingly.

Components of the Labor Costing System:

1. Time Tracking: Employees log their work hours using electronic time
tracking systems or manual timesheets, depending on the department and job
role. This data includes regular hours, overtime, and breaks.
2. Labor Rates: Labor rates are established for different job roles and skill
levels within the organization. These rates account for base wages, benefits, and
any additional compensation elements.
3. Allocation to Jobs: Once the time data is collected, it is allocated to
specific jobs or projects based on the work performed. This allocation helps
attribute labor costs accurately to each job.
4. Overhead Allocation: Labor costs are often a part of the overhead
costs for a job. The labor costing system includes mechanisms to allocate a
portion of these costs to individual jobs based on predetermined allocation
methods.
5. Analysis and Reporting: The system generates reports that detail
labor costs by job, department, or time period. This information is crucial for job
costing, budgeting, and performance evaluation.

Weaknesses of the Current Labor Costing System:

While the labor costing system at XYZ Manufacturing Company is functional, it does
have some weaknesses that need addressing:

1. Inefficiencies in Data Collection: The reliance on manual

timesheets in some departments can lead to errors, delays, and data entry
mistakes. This can result in inaccurate labor cost allocation.
2. Complexity in Overhead Allocation: The method used for
overhead allocation can be complex and may not reflect the actual usage of labor
in each job accurately. This can lead to discrepancies in job costing.
3. Limited Real-Time Reporting: The current system's reporting
capabilities are not entirely real-time, which can hinder managers' ability to make
timely decisions regarding labor costs and resource allocation.
4. Inability to Track Non-Productive Time: The system
primarily tracks productive time, but it does not effectively monitor non-
productive time, such as downtime or training hours. This can lead to
underutilization of labor resources.

Suggestions for Improvement:

To create a more effective labor costing system, XYZ Manufacturing Company should
consider the following improvements:

1. Automation: Invest in advanced time tracking and data collection systems

to automate the process. Implement biometric attendance systems or electronic
time clocks to reduce human errors.
2. Streamlined Overhead Allocation: Reevaluate and simplify
the overhead allocation method to ensure it aligns more closely with the actual
usage of labor resources. Consider using activity-based costing for a more
accurate allocation.
3. Real-Time Reporting: Upgrade the reporting capabilities of the
system to provide real-time access to labor cost data. Implement dashboards and
analytics tools to enable managers to monitor labor costs more effectively.
4. Non-Productive Time Tracking: Include mechanisms to track
non-productive time accurately. This can help identify areas where labor
resources are underutilized and make adjustments as needed.
 5. Regular Training: Ensure that employees responsible for data entry and
allocation are well-trained to minimize errors in the system.
6. Cost Control Measures: Develop cost control measures and
budgeting tools within the labor costing system to proactively manage labor
expenses and prevent cost overruns.
7. Integration: Integrate the labor costing system with other financial and
operational systems within the organization for seamless data flow and
comprehensive cost analysis.

By implementing these improvements, XYZ Manufacturing Company can enhance the

accuracy, efficiency, and timeliness of their labor costing system, ultimately leading to
better cost management and decision-making processes.