Behaviour of Costs - Cocolat Ltd - Assignment Example

Behaviour of Costs Behaviour of Costs TASK a) Production budget in units for Sigma and Theta Period 7 Period 8 Sigma Thetas Sigma Thetas Finished Stock 995 1200 Working days 5 8 Absorption Cost of Finished Stock £45 £60 Sales 995 1200 (b) Material purchases budget in kilograms Product Material Required in Kg Material Cost per Kg Total cost of the Material Sigma 9 £5 £45 Theta 12 £5 £60 (c) Cost of material purchases budget Product Material Required (Kg) Material Cost per Kg Total cost of the Material Material Wastage Material Wasted Material Utilized Cost Loss Incurred Sigma 9 £5 £45 2% 0.18 8.82 £0.9 5 (d) Direct labour hours budget No. Of Employees Hours worked by each Employee per week 20 35 (e) Cost of direct labour budget No. Of Employees Hours worked by each Employee per week No of Sigmas made in an hour No of Sigmas made in all the labour hours No of Thetas made in an hour No of Thetas made in all the labour hours 20 35 7 245 4 140 TASK 2 Original Budget Actual Flexed Budget Variances Fav/Adv Volume (units) 85,000 100,000 100,000 £ £ £ £ Turnover 1,445,000 1,690,000 1,690,000 245,000 Costs: Materials 510,000 580,000 580,000 70,000 Labour 382,500 416,000 416,000 32,500 Distribution 212,500 255,000 255,000 42,500 Energy 100,000 105,000 105,000 5,000 Equipment Hire 18,000 19,500 19,500 1,500 Depreciation 24,000 24,500 24,500 500 Marketing 23,000 26,000 26,000 3,000 Administration 20,000 18,000 18,000 2,000 Total Costs 1,290,000 1,444,000 1,444,000 157,000 TASK 3 Per the calculations above, there are many significant variances which have been noted. First, in the variables i.e. Material, labour and distribution, the variance is quite high. For example, for materials, the variance is 70, 000 units, for labour, the variance is 32,500 units and for distribution the variance is 42,500 units. Energy (semi-variable) had variance though not as high as that of the variables. For Equipment hire budget, it is based on the cost for each 10,000 units or fewer. For the other factors like depreciation, Marketing and Administration, the variance is not quite significant since these three factors are fixed. Variance usually is made up of two aspects or components. These components include differences based on the activity and the differences based on the price and based on the efficiency of the usage. The significant variance detected in the variables and the semi variable may have occurred due to several reasons. First, the material variance may have been caused by some favourable factors and some adverse factors. Some of the favourable causes are such as availability of skilled purchase and buying, purchasing materials of lower quality and finally a detectable fall in the market prices. Some of the possible adverse cause of the material variance include such factors as poor purchasing or buying, purchases and buying of materials of higher quality and eventually rises in the market prices. Labour variance could also have been caused by favourable and some adverse factors. Some of the favourable causes of labour variance could have included factors such as advancements in technology, better training and better employees and wages for the employees. Some of the adverse factors include things such as machinery that wears out now and then, some training might be poor and yet the employees too might be poor in performance. The distribution variance too could have been caused by various factors. These factors could have included things such as poor transportation means for the chocolate, inefficient delivery of the chocolate to the business, mime mismanagement among other factors (Tulsian 2006, p 14). TASK 4 Cocolat Ltd. Can be described as having quite a wonderful budgetary process. The budget of the Cocolat Ltd takes into account all the features of chocolate making right from the material purchase all the way till the Marketing and Administration features are covered. The chocolate production process by the Cocolat Ltd. Runs via a process starting with the materials, covering labour, distribution and energy required. Also, all the equipment hired and required must also be considered. Finally, some occurring and unavoidable losses are covered under the depreciation part of it and finally the last aspects of marketing and Administration of the chocolate is covered. In the budget of the Cocolat Ltd., there is quite a detectable contrast between the tops down approach and the bottom up approach. As can be observed, in the top down approach, it seems that for the variance (to be particular) gradually decreases as the units and features run from the first aspect (material) to the final aspects (marketing and administration). Similarly, in the bottom up approach, for the variance (to be particular) observes an increasing tread. For instance, if we consider the variables, the top down approach observes a decreasing trend while the bottom up approach observes an increasing or rising trend. A functional budget is a Budget that relates to the individual functions in an organisation as in the Cocolat Ltd. An organisation’s master budget is any summary that is consolidated based on the various functional budgets of the organisation. For an organisation to come up with a master budget, they must have made several functional budgets so that they can consolidate them into a master budget (Tulsian 2006, p 18). TASK 5 Cocolat Ltd uses a Process Costing system in the manufacture of its chocolate. The Process Costing System covers the various processes through which the cocoa is passed through to make chocolate. The process costing system is a composition of the raw material (cocoa) which passes through various production and manufacturing processes to becoming the chocolate distributed into the business. The first process in the Process Costing System is the acquisition of raw materials. This will call for the Cocolat Ltd. To purchase and buy cocoa from cocoa growing farms or it will demand that they produce their own cocoa. Secondly, it calls for the Cocolat Ltd. To cover the transportation cost of the cocoa into the industry. Again, the machinery used in the production process and manufacturing. Then the labour cost is again covered. All the losses occurring during the production process are again included following even the depreciation. Finally, the distribution and marketing is also involved in the Process Costing System. Below are some numerical examples which support the above answer. Original Budget Actual Flexed Budget Cost Materials 510,000 580,000 580,000 1,000,000 Labour 382,500 416,000 416,000 990,000 Distribution 212,500 255,000 255,000 500,000 Energy 100,000 105,000 105,000 250,000 Equipment Hire 18,000 19,500 19,500 550,000 Depreciation 24,000 24,500 24,500 30,000 Marketing 23,000 26,000 26,000 12,000 Administration 20,000 18,000 18,000 15,000 From the above table, the values show that for each production process of the Cocolat Ltd. Some cost is incurred. The cost of everything is covered in the Process Costing System. Reference Tulsian. 2006. Business Organisation and Management. Australia: Applecross. Read More