Managerial Accounting: How To Estimate Cost and Prepare Budget?

Managerial
Accounting
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Table of Contents
Introduction................................................................................................................................3
Question 1..................................................................................................................................3
a) Production report for Department A..................................................................................3
Question 2..................................................................................................................................5
a) Outline of industry, organization and internal accounting system.....................................5
(b)...........................................................................................................................................6
c) Agency costs for Marks and Spencer.................................................................................8
d) Recommendations for reducing agency costs....................................................................9
Conclusion................................................................................................................................10


INTRODUCTION
Managerial accounting is considered to be highly important for the purpose of
estimating costs and preparation of budgets. It is through managerial accounting that the
organization is able to support its decision making process in an effective manner. The
accounting techniques provide a way to maintain budgets and it also estimates the cost for
different operations. The range of costing techniques is available under the scope of
managerial accounting.
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Moreover, the organization is able to undertake appropriate pricing decisions through

adoption of appropriate methods. In case of managerial accounting, the reports and
calculations are presented for different departments. The report presented herewith provides
an overview of manner in which costs are estimated. Moreover, it throws light on the
accounting systems that have been adopted and techniques that can be adopted under
managerial accounting.


QUESTION 1
a) Production report for Department A
The business unit is assumed to be responsible for estimating cost per unit
manufactured. The organization needs to accounts for work in process and proportion of
work completed. This in turn helps in estimating appropriate cost per unit of products
manufactured. Product report for Department A of Nano Tech Pte Ltd is presented
underneath in detail. It helps in estimation of physical flow of units, equivalent units, per unit
cost and so on. The calculations and table presented below develops an understanding of
estimation of per unit cost through weighted average method.
Total input=Opening work progress units+Units introduced
Total input=10000 units+160000 units
Total input=1700000 units
Closing work progress=18000 units
Completed production=Total input Closing workprogress
Completed production=17000018000
Completed production=152000 units
Table 1: Units to be accounted for

IN
Units to be accounted for Units
Units in beginning WIP inventory, June 1 (Beginning balance) 10000
Units started during June (Transfer in) 160000
Total units to be accounted for 170000
OUT
Units completed (transfers out) 152000
Units in ending WIP inventory , June 30 (Ending balance) 18000
Total units accounted for 170000
Table 2: Equivalent units

Equivalent units
% Direct Direct Overh
Units accounted for complete Materials Labour eads
Units completed and
transferred out 152000 100% 152000 152000 152000
Units in ending WIP 18000 30% 18000 5400 5400


inventory
170000 170000 157400 157400
Table 3: Total costs to be accounted for

Direct Direct Overhea
Costs to be accounted for Materials Labour d Total
Costs in beginning WIP 102000 69000 45000 216000
Costs incurred during June 2040000 880650 540000 3460650
Total costs to be accounted
for 2142000 949650 585000 3676650
Table 4: Cost per unit

Direct Material Direct Labour Overhead Total
Total costs to be accounted for 2142000 949650 585000 3676650
Total equivalent units 170000 157400 157400 484800
12.60 6.03 3.72 22.35
Table 5: Summary of equivalent units and cost per unit

Cost incurred
Elements of Equivalent Previous Current Cost per
costs units period period Total unit
Direct Material 170000 102000 2040000 2142000 12.6
Direct Labour 157400 69000 880650 949650 6.03
Overhead
expenses 157400 45000 540000 585000 3.72
Total 3676650 22.35
Table 6: Total costs

Equivalent Cost per Total Component
Elements of costs units unit cost cost
Completed production
Direct Material 152000 12.6 1915200
Direct Labour 152000 6.03 916560
Overheads 152000 3.72 565440 3397200
Closing work in
progress
Direct Material 18000 12.6 226800
Direct Labour 5400 6.03 32580.11
Overheads 5400 3.72 20069.89 279450
Total cost 3676650


QUESTION 2
It is essential to evaluate the organizational structure and its performance from time.
In order to conduct the analysis of industry, organizations design and financial resources of
Marks and Spencer is selected. An in-depth evaluation of the business unit and its accounting
system is presented underneath in detail.
a) Outline of industry, organization and internal accounting system
Marks and Spencer is operating as a retail sector unit with its operations across
various countries. Retail industry is considered to be a highly growing sector within United
Kingdom. The industry has achieved the high level of growth in recent past. The retail
industry in United Kingdom is highly developed. The large number of players within an
economy indicates the growth that is achieved by the sector. The country is known for highly
developed retail industry. It can be said that the retail sector provides a wide range of
opportunities to the organizations.
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As per the estimations wholesale and retail trade within United Kingdom constitutes
approximately 16% of economic output and 16% of employment in 2012. It can be said that
the sector supports economic growth and development at whole. Moreover, it is expected that
retail sector is going to achieve high growth in future.
Marks and Spencer Plc is one of the leading organizations in retail sector of United
Kingdom. It has occupied prominent positions through its unique selling proposition for
clothes, home products and luxury food products. The organization is known for goods


offered since it specializes in selling British-made products. The business unit acquires
products by entering into long-term relationship with manufactures. The business unit is
known for quality of products. Moreover, the organization also sells some of branded
products so as to satisfy consumers demand. Clothing division of the organization has
acquired approximately 11% of market share of United Kingdom by 2013. It can be said that
the business unit has achieved significant growth by capturing large market share through its
unique value proposition. It facilitates to cater need of different types of buyers and create
distinctive image of the firm at the marketplace. On the other, company has wide range of
products and services in different segment that aid to increase overall rate of return.
In order to maintain internal accounting system, Marks & Spencer follows several
practices and regulations that have been laid down by the government. In this regard, firm
follows International Financial Report Standard by which all important financial statements
are prepared by the firm such as balance sheet, cash flow statement and income statement.
The same is published for the sake of investors that provide evidence that firm is operating in
an effectual manner (Elmassri and Harris, 2011). At this stage, Marks & Spencer gives detail
specification about debt, dividend and return of shareholders. In addition to this, management
takes into account general account principle that aid to maintain transparency ion the internal
accounting system of company. It assists investors to get detail knowledge about the company
so as to invest in the same for getting higher rate of return. Further, in case of any fault that
has occurred in the financial statement, management is entitled to report the same to public
(Lindhoim and Suomala, 2007). It facilitate to safeguard interest of all stakeholders by which
corporation can create its good will in the marketplace. Along with that, company also
disclose its on- balance sheet and off-balance sheet instrument that aid to depicts fair value of
the firm. Furthermore, all information related to employee benefits and managerial
remuneration is also disclosed along with corporate social responsibility of company.
Moreover, proper reporting is done for intangible assets as well that aid to build strong image
of firm in the marketplace.
(b)
(i)System for measuring performance


From the analysis of organizational structure and internal accounting system it has
been found that, Marks & Spencer measures its performance on the basis of financial
statement. For example if there is increase in the revenue of company increased from the
previous years then organization is said to better performance (Macintosh and Quattrone,
2010). Furthermore, performance is measured in several aspects such as employees
retention, increase in number of customers and increase in share value of firm. Here, increase
in the number of customers, depicts that employees are delivering good quality of services to
large number of buyers. It facilitates to create brand image of firm in the marketplace and
also assist management to motivate employees in monetary or non-monetary term (Waal and
et. al., 2011). On the other hand, if share value of firm is increased then it depicts that Marks
& Spencer is able to satisfy investors. It increases scope of development and growth of
organization as the inventors attract to invest in the organization. It contributes towards
increasing productivity as well as profitability. In addition to this, Marks & Spencer keep
daily record of personnel and appraise the same by taking views of managers of different
departments. Moreover, management of firm also takes into account growth of several other
branches of the same in order to measure the performance.
(ii) System for rewards and punishes the performance
In order to reward of punish performance of employees; Marks & Spencer adopt
several types of strategies. It consists of monetary or non-monetary rewards that facilitate to
boosts morale of employees and enables them to meet expectations of top management. Here,
workforce of Marks & Spencer is rewarded for their achievement and their work is appraised
in company. It gives higher level of motivation among employees by which they are powered
to move to ahead (Oliveira and et. al., 2010). On the other hand, demotion can be offered for
those who are not performing up to the mark even on lot of efforts by the management end.
By this way, employees get motivation for recover their position in the organization. It can be
critically evaluated that, demotion may leads to resignation of employees from the Marks &
Spencer. In addition to this employees are provided equal opportunities for learning and
personal growth that serve as motivation for them (Terrance, 2014). In this regard, workers
who perform on the basis of set standard are paid incentive, bonus and other benefits,
Furthermore, transfer and promotion is also the imperative ways to rewards workforce so


they can work with zeal and enthusiasm. Hence, the rewards and punishment system of
Marks & Spencer is appropriate so as to ensure organizational success for the long run.
(iii) System for partition decision right
Management of Marks & Spencer uses appropriate partition decision right for
employees. Under this, employees are asked while allocating the job and manage make it sure
that they possess knowledge and skills to do the particular task (Silvester and et. al., 2014).
However, it based on situation of company. For example, in case company want to implement
immediate change then employees will not be asked and they will directly give order to
follow. It facilitates management to implement change as soon as possible that leads to
increase overall rate of return of company in the marketplace (Sandalgrh and Bukh. 2014).
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On the other hand, in daily work schedule, employees or line managers are asked related to
their interested work areas and they are also communicated properly for the same. Moreover,
line managers take suggestion of employees for bringing improvement at the workplace so
that management can make modifications accordingly. Likewise, employees are also invested
to give suggestion when company plan to expand the business or cover new geographical
areas and also at the time of setting standard for the quality of products as well as services.
c) Agency costs for Marks and Spencer
Agency costs are referred to as internal costs that are paid to individuals who assumes
role of agents. The costs is incurred due to conflict arises in interest of agents and principles.
In the publically listed company, agency costs mainly arise due to problems between


shareholders and management. Shareholders are considered to be real owners of the
organization who wish to maximize their wealth by increasing value of the business unit.
However, management tends to earn more amount of money in the form of fringe benefits or
basic salary. It can be said that the management desires to maximize their individual wealth
and decision making power. The conflict in interests among shareholders and managers leads
to rise of agency costs within business unit (Silvester and et. al., 2014). Marks and Spencer,
being a publically listed company is funded by investment on part of shareholders. The
business unit tends to satisfy shareholders needs by declaring interim and annual dividends
on regular basis. The organization however is owned and operated by experienced
professional. In return for the services offered to the company, the top and middle level
management demands high amount of return. The business operations are management by
management on account of shareholders. Henceforth, the major agency costs for marks and
Spencer is conflict that arises between shareholders and management. The management
although strives to increase overall profitability of the organization (Oliveira and et. al.,
2010). However, they attempt generate huge return for themselves instead of shareholders.
On other hand shareholders desires to earn sufficient amount of return on investment made.
Besides, shareholders agency costs in case of Marks and Spencer arises due to conflict of
interests between management and bond holders. The debenture or bond holders have
provided debt within business unit (Terrance, 2014). They also desire to earn adequate
amount of return on the money invested. The management tends to delay their return for their
personal benefit. This in turn results in rising of agency costs within the business unit. It can
be therefore said that high level of agency costs arises in case of Marks and Spencer. The
conflict between investors and management results in increasing costs for the organization.
Further, the business unit tends to outsource some of its operations so as to manage
large-scale operations. In such cases the consultants tend to charge high fees for the efforts
involved on their part (Elmassri and Harris, 2011). This in turn leads to rising of agency costs
for the organization. It is essential for the business unit to control agency costs so as to
improve efficiency. The organization needs to evaluate interests of stakeholders before
deciding business strategies. The agency costs may result in hampering business operations in
long run. Moreover, the profitability of the organization may also reduce due to high level of


agency costs. It becomes difficult for business unit to formulate appropriate strategies due to
conflict in interests (Macintosh, and Quattrone, 2010). Moreover, the management is unable
to decide future course of action without permission of shareholders. It can be said that the
organization is able to conduct its operations in an efficient manner when all interests of all
stakeholders are satisfied. The agency costs arise only when there is a conflict between two
groups of stakeholders. It is essential for the business unit to maintain a balance between
interests of all groups of shareholders. The consequences of high level of agency costs are
highly adverse in nature (Oliveir and et. al., 2010). It is therefore necessary for the
organization to take appropriate measures for controlling the same.
d) Recommendations for reducing agency costs

It is seen that high level of agency costs may lead to hamper overall growth of the
organization. Marks and Spencer is one of the leading organizations within retail industry.
The business unit should strive to satisfy need of all its stakeholders. This in turn helps in
reducing agency costs for the organization. First of all, the organization should involve some
of its shareholders into decision making process. Moreover, the management should be
allotted certain amount of shares. The organization should strive to reduce difference between
shareholders and management. This in turn helps in reducing agency costs for the
organization (Sandalgrh, and Bukh. 2014). Majorly, the organization faces issues of agency
costs due to conflict of interests among shareholders and management. This conflict can be
resolved by including same group of individuals among shareholders and management of the
business unit. The agency costs that arise as a result of conflict between bond holders and
management can also be resolved. The business unit should ensure regular payments in form
of interests to bond holders. This in turn makes them satisfy for the amount received as a
return on investment made. The bond holders demand adequate level of return on their
investment. It is through regular payment of interest at pre-decided rate the organization is
able to satisfy their needs. It can be said that the business unit is able to reduce their cost by
implementing above described strategies. Company can reduce the overall costs by reducing
the overlapping and replication of activities. Further it is essential to ensure waste
management. Agency cost can also be improved by developing a sound and healthy


relationship between shareholders and management. Relationship is to be build up in a
manner that they can perform negotiation over all types of costing issues.
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CONCLUSION
The report presented herewith deals with various concepts of managerial accounting.
It is seen that the organization is able to achieve success only when proper accounting
methods are adopted. The report provides an overview of manner in which weighted average
method can be adopted for the purpose of estimating per unit cost. It is seen that the marks
and Spencer is adopting appropriate accounting concepts to support business operations.
However, the organization faces an issue of agency problems due to conflict of interests
among stakeholders. It is therefore necessary for business to take appropriate measures so as
to support growth in long run.


REFERENCES
Besley, S., and Brigham, E., 2007. Essentials of Managerial Finance. Cengage Learning
Butt, M., 2010. Variance analysis. Accounting, Auditing & Accountability Journal. 23(6).
pp.816-816.
Elmassri, M., and Harris, E., 2011. Rethinking budgetary slack as budget risk management.
Journal of Applied Accounting Research. 12(3). pp. 278-293.
Lindhoim, A., and Suomala, P., 2007. Learning by costing: Sharpening cost image through
life cycle costing. International Journal of Productivity and Performance Management.
56(8). PP. 651-675.
Macintosh, N. B., and Quattrone, P., 2010. Management Accounting and Control Systems: An
Organizational and Sociological Approach. John Wiley & Sons
Oliveira, L., and et. al., 2010. Intellectual capital reporting in sustainability reports. Journal
of Intellectual Capital. 11(4). pp.574-594.
Sandalgrh, N., and Bukh. N., 2014. Beyond Budgeting and change: a case study. Journal of
Accounting & Organizational Change. 10(3). pp. 409-423.
Silvester, K., and et. al., 2014. Does process flow make a difference to mortality and cost? An
observational study. International Journal of Health Care Quality Assurance.27(7).
pp.616-632.
Terrance, L. C., 2014. Strategic budgeting instead of strategic planning. The Bottom Line:
Managing Library Finances. 27(2). pp. 49-53.
Waal, D. A., and et. al., 2011. The evolutionary adoption framework: explaining the
budgeting paradox. Journal of Accounting & Organizational Change. 7(4). pp. 316-
336.


Managerial Accounting: How To Estimate Cost and Prepare Budget?

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a) Production report for Department A..................................................................................3

a) Outline of industry, organization and internal accounting system.....................................5

c) Agency costs for Marks and Spencer.................................................................................8

d) Recommendations for reducing agency costs....................................................................9

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Moreover, the organization is able to undertake appropriate pricing decisions through

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Table 1: Units to be accounted for

Table 2: Equivalent units

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Table 3: Total costs to be accounted for

Table 4: Cost per unit

Table 5: Summary of equivalent units and cost per unit

Table 6: Total costs

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d) Recommendations for reducing agency costs

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