Budgets for Planning and Control - Part 2

BUDGETS FOR PLANNING AND CONTROL

Let’s look at the simple example....again...

Sales of Product STU       1,000 units

Selling price/unit             RM150

Opening inventory for Product STU 200 units
Opening inventory for Material AA  2,500 units
Opening inventory for Material BB  800 units

Direct material for making product STU

 - Material AA        5 units@RM2.50 unit

 - Material BB        2 units@RM1.50 unit

Direct labour         3 hours@RM5.00 per hour

Overheads            RM1.50 per direct labour hour

Cash available at the beginning RM80,000

Prepare;

1.   Sales budget

2.   Direct material budgets

3.   Direct labour budgets

4.   Overhead budgets

and....again...

Sales of Product STU       1,000 units

Selling price/unit             RM150

Opening inventory for Product STU 200 units
Opening inventory for Material AA  2,500 units
Opening inventory for Material BB  800 units

Direct material for making product STU

 - Material AA        5 units@RM2.50 unit

 - Material BB        2 units@RM1.50 unit

Direct labour         3 hours@RM5.00 per hour

Overheads            RM1.50 per direct labour hour

Cash available at the beginning RM80,000

Notes: The management had decided to create a closing inventory for both finished goods and the direct materials. The finished goods to be set at 25% from the total sales unit and the direct material is to increase by 100 units for both codes.

Prepare;

1.   Sales budget

2.   Direct material budgets

3.   Direct labour budgets

4.   Overhead budgets

Kanban

Kanban is a scheduling system for lean manufacturing and just-in-time manufacturing. Taiichi Ohno, an industrial engineer at Toyota, developed kanban to improve manufacturing efficiency. Kanban is one method to achieve JIT. The system takes its name from the cards that track production within a factor

Budgets for planning and control - Part 1

BUDGETS FOR PLANNING AND CONTROL

Why we do budgets? Why it is important to the organization? The topic we are learning is the combination from two subjects namely Management and Accounting. That is why when we merged it together, a subject called Management Accounting comes to live.

The management basic processes are POLC that is Planning, Organizing, Leading and Controlling, whereas the Accounting is the process of relaying financial information to its users. We combined all those together we would have a proper planning or forecasting and implementation the best method in production hence producing viable important numbers that could aid the decision making of an organisation.

One of those is Budgets. Of course people like to spend and they will spend on whatever they think are suitable and relevant to them. Satisfying their needs and wants. But with the limited resources (scarcity), they have to plan. They have to based on the historical data to forecast the future. For example, if you want to sell something, you need to make a sales projection consisting of how many units you want to sell. From the projection, then you need to estimates the raw material usage, the direct labour used and other related cost associated with the sales. All are costs. Say, everything has been counted for, then you need to make a cash budget estimating how much money you need for the implementation process.

Let’s look at the simple example….

Sales of Product STU       1,000 units

Selling price/unit             RM150

Direct material for making product STU

 - Material AA        5 units@RM2.50 unit

 - Material BB        2 units@RM1.50 unit

Direct labour         3 hours@RM5.00 per hour

Overheads            RM1.50 per direct labour hour

Cash available at the beginning RM80,000

Prepare;

1.   Sales budget

2.   Direct material budgets

3.   Direct labour budgets

4.   Overhead budgets

* assume the is no opening stock for any of them.

Difference between Job Costing and Batch Costing

A good writing for the topic. Take a look at this and may you find what this is all about.

Difference Between Job Costing and Batch Costing

March 22, 2017 By Surbhi S 

https://keydifferences.com/difference-between-job-and-batch-costing.html

Job costing method is mainly applied when the goods are produced, or services are rendered as per customer’s order. On the other hand, batch costing is a type of job costing, in which goods are produced in a lot of similar units, called as batches.

Whether we talk about business or industry, costing system is required everywhere to fix the price of products, to ascertain cost associated with the product and so on. However, a single costing system is not capable enough to fulfill requirements of various industries. Hence, different costing systems are designed, that businesses can use as per the nature of products, operations, and other parameters.

Basically, costing methods are classified into specific order costing and operation costing. Specific order costing is one where the production comprises of separate jobs, batches or contracts. So, it covers three costing methods, i.e. job costing, batch costing and contract costing. This article excerpt presents you all the important differences between job costing and batch costing, have a glance.

Content: Job Costing Vs Batch Costing

1. Comparison Chart
2. Definition
3. Key Differences
4. Example
5. Conclusion

Comparison Chart

BASIS FOR COMPARISON	JOB COSTING	BATCH COSTING
Meaning	Job costing refers to a specific costing method, used when the production/work is carried out according to the requirements of customers.	Batch costing, is a form of job costing, that is applied when the articles are produced in batches, i.e. a group of like units are produced.
Production	As per customer specification	Mass production
Product	Product have an independent identity, as each job is distinct from other jobs.	Products do not lose their individual identity, as they are manufactured in continuum.
Cost unit	Executed Job	Batch
Cost ascertainment	On the completion of each job.	Ascertained for the whole batch and then per unit cost is determined.

Definition of Job Costing

Job costing is described as a costing method, wherein customized production of goods or services are rendered. The method of costing is used when jobs are performed for different customers as per their orders. Under this system, each cost unit is treated as a separate entity, for costing purposes. Each job differs from another job in respect of:

• Material used
• Labors required
• Special customer needs

In this system, on the receipt of an inquiry from the client, the cost to be incurred is ascertained and based on the estimate, the price is quoted. The cost of material, labor and overhead incurred during the job is accumulated, and when the job is accomplished, these are compared with the quoted price, so as to determine the profit or loss of each job. It may extend to multiple accounting periods, and so they are not associated with particular periods.

Definition of Batch Costing

Batch Costing may be understood as a variant of job costing. In this system, a group of identical units, comprising of a batch is used as a cost unit, to estimate cost. To ascertain the cost per unit, the total cost of the batch is divided by the number of units produced in a batch, as represented below:

For each batch, a cost sheet is prepared and maintained, by allotting a batch number. There is batch wise preparation of material requisition note, engagement of labor and recovery of overheads.

This costing method is employed by firms to manufacture a large number of similar items or components, as they pass through the same process and so it is beneficial to ascertain their cost of production collectively.

Key Differences Between Job Costing and Batch Costing

The points given below are noteworthy so far as the difference between job costing and batch costing:

1. A costing system applied when the production is made as per the customer’s needs and preferences are called as job costing. On the other hand, batch costing implies a costing method, generally adopted when the production is made in small lots of identical units.
2. In job costing is undertaken for the product produced by separate orders. Conversely, batch costing is carried out when there is mass production, and the units are homogeneous.
3. In job costing, each product has a unique identity, as each job is distinct from other jobs regarding material used, customer needs, hours of labor worked, etc. In batch costing, products usually lose their identity, as they are produced in the continuum.
4. In job costing, the cost unit is the executed job, whereas, in the case of batch costing, the cost unit is a particular batch.
5. In job costing, the cost is determined for each job after its completion. However, in batch costing cost is ascertained for the entire batch, after which cost per unit is computed by dividing the total cost by the number of units.

Examples

Job costing is employed in industries such as:

• Printing Press
• Shipbuilding
• Interior Decoration
• Furniture
• Heavy machinery

Batch Costing is employed in industries such as:

• Pharmaceuticals industry
• Ready made garments
• Manufacturing of tube & tyre.
• Manufacturing of electronic parts
• Manufacturing of toys

Conclusion

Since batch costing is a type of job costing; the two closely resemble one another in the sense that each batch has a separate treatment like job and cost are ascertained for the whole batch. However, there are significant differences between these two costing methods. Moreover, job costing applies to both product and service industry, but batch costing is only applicable to product industry.

RELEVANT COSTING - Add or Drop (Department/Service)

Add or Drop Decision

A decision whether or not to continue an old product line or department, or to start a new one is called an add-or-drop decision. An add-or-drop decision must be based only on relevant information.

Relevant information includes the revenues and costs which are directly related to a product line or department. Examples of relevant information are sales revenue, direct costs, variable overhead and direct fixed overhead. Such decision must not be based on irrelevant information such as allocated fixed overhead because allocated fixed overhead will not be eliminated if the product line or department is dropped.

The following example illustrates an add-or-drop decision:

Example

A company has three products: Product A, Product B and Product C. Income statements of the three product lines for the latest month are given below:

Product Line	A	B	C
Sales	$467,000	$314,000	$598,000
Variable Costs	241,000	169,000	321,000
Contribution Margin	$226,000	$145,000	$277,000
Direct Fixed Costs	91,000	86,000	112,000
Allocated Fixed Costs	93,000	62,000	120,000
Net Income	$42,000	− $3,000	$45,000

Use the incremental approach to determine if Product B should be dropped.

Solution

By dropping Product B, the company will loose the sale revenue from the product line. The company will also obtain gains in the form of avoided costs. But it can avoid only the variable costs and direct fixed costs of product B and not the allocated fixed costs. Hence:

If Product B is Dropped
Gains:
Variable Costs Avoided	$169,000
Direct Fixed Costs Avoided	$86,000	$255,000
Less: Sales Revenue Lost		$314,000
Decrease in Net Income of the Company		$59,000

Written by Irfanullah Jan

https://accountingexplained.com/managerial/relevant-costing/add-or-drop-product-line

Relevant Cost Exercise - Make or Buy

Furniture Inn manufactures computer tables. Recently a supplier has offered the tables of the same quality @ $14 each with an assurance of continued supply. The following is the budget for 4000 units prepared for the quarter ending 30 September 2016:

Required:

(a) Should Furniture Inn accept the offer from the supplier?

(b) What would be the decision if the supplier offered the tables at $12 each?

Solution:

 Calculation of per table marginal cost of production

(a) As marginal cost of production is less than the buying price offered by the supplier so Furniture Inn should continue production of tables. The distribution, administration and fixed production are irrelevant in the decision as presumptively they will be incurred in either case.

(b) As in this case they buy in price $12 is less than the marginal cost of production so Furniture Inn should buy the tables from the supplier and discontinue production of tables provided other things are favorable.

Qualitative Factors of Make or Buy Decision

QUALITATIVE FACTORS

COST AND TIME

Perform the quantitative analysis by comparing the costs incurred in each option. The cost of purchasing products from suppliers is the price paid to purchase them. In contrast, the cost of production includes both fixed costs and variable costs. For example: a business needs 10 units of its product in 10 consecutive periods; it can either purchase the units at $100 per unit or spend $1,000 to set up production facilities and $8 to produce each unit. Since the business spends $10,000 to purchase the products and $9,000 to produce the same number of products, it is better for the business to produce the products based on quantitative factors alone.

SUBJECTIVE JUDGEMENTAL

Consider qualitative factors that can influence the decision to produce the products. This includes all relevant factors that cannot be reduced to numbers, such as the experience of the business' production department and the quality of its management. For example, it might be possible that the business has no experience in producing a particular product and its prior experience in producing other products cannot be applied.

RELIABILITY AND TRUSTWORTHINESS OF SUPPLIERS

Consider qualitative factors that can influence the decision to purchase the products from outside suppliers. Examples of such factors include the suppliers' trustworthiness, the quality of its management, and the quality of its products. For example, it might be possible that the business' supplier has extensive experience in producing the product being considered and that the business wants to cultivate a long-term relationship with its supplier.

QUALITY AND RELIABILITY OF PRODUCTS SUPPLIED

Factor the qualitative factors into the quantitative analysis in order to complete it. For example, in this case, although it is cheaper for the business to produce its products, there are reasons to believe that its products will be lower quality than those that it can purchase. Furthermore, since the business wants to cultivate a long-term relationship with its supplier, it might want to purchase its products from that supplier in order to initiate the relationship.

BENEFITS - LONG TERM AND SHORT TERM

Come to a final make-or-buy decision once both quantitative and qualitative factors have been considered; this will depend on the business in question and what it is doing in order to earn its profits. Continuing to use the above example, although the business likely can purchase higher-quality products than what it can produce, the quality of its products might not influence its sales depending on its business model and what it is selling. If this is the case, the desire to cultivate a long-term relationship may or may not be enough to outweigh the $1,000 savings in costs; it depends on how badly the business wants the relationship and what it can hope to achieve by initiating it.

from https://smallbusiness.chron.com/to-qualitative-measures-makeorbuy-decisions-35918.html