CMA Assignment

(Umang Arora_20407)

Q1: Explain target costing and activity/productivity based

costing?
Target costing :- Target costing isn't simply a way of costing, however instead a
control method in which costs are decided with the aid of using marketplace
conditions, thinking of numerous elements, which include homogeneous products,
degree of competition, no/low switching prices for the give up customer, etc. When
those elements come into the picture, control desires to manage the prices, as they
have got very little manage over the promoting price.

Target Costing = Selling Price – Profit Margin

Key Features of Target Costing:

1. The price of the product is decided via way of means of marketplace conditions. The
organization is a charge taker as opposed to a charge maker.

2. The minimal required profit margin is already covered withinside the goal promoting
price.

3. It is a part of control’s method to attention on fee discount and powerful fee control.

4. Product design, specifications, and client expectancies are already integrated even as
formulating the full promoting charge.

5. The distinction among the modern fee and the target cost is the “cost reduction,” which
control desires to acquire.

6. A crew is shaped to combine sports along with designing, purchasing, manufacturing,

marketing, etc., to locate and acquire the target fee.

Activity-based costing :- Activity-based costing (ABC) is a costing technique that assigns

overhead and indirect prices to associated merchandise and services. This accounting
technique of costing acknowledges the connection among prices, overhead activities, and
synthetic merchandise, assigning indirect prices to merchandise much less arbitrarily than
conventional costing methods. However, a few indirect prices, which include control and
workplace body of workers salaries, are tough to assign to a product.

Benefits of Activity-Based Costing (ABC)

Activity-based costing (ABC) complements the costing system in 3 ways. First, it expands the
quantity of fee swimming pools that may be used to gather overhead prices. Instead of
gathering all prices in a single company-extensive pool, it swimming pools prices through
activity.

Second, it creates new bases for assigning overhead prices to objects such that prices are
allotted primarily based totally at the activities that generate prices in preference to on
extent measures, which include device hours or direct hard work prices.

Finally, ABC alters the character of numerous oblique prices, making prices formerly taken
into consideration oblique—which include depreciation, utilities, or salaries—traceable to
positive activities. Alternatively, ABC transfers overhead prices from high-extent
merchandise to low-extent merchandise, elevating the unit fee of low-extent products.

Q2. Explain the steps in budgetary control. What re the

different types of budgets available. Differentiation between
fixed budgeting and flexible budgeting?
Step 1 – Establish Actual Position

All firms have a few shape of an accounting gadget which information their profits and
expenditure. Depending at the gadget, budgets might be recognized with the aid of using a
few shape of finances code. Income and expenditure is then recorded in opposition to the
finances code. This permits finances holders to perceive their real finances role at any factor
in time. This statistics is typically furnished with inside the monetary control record. The
fashion and content material of the record will range from one corporation to any other and
might be depending on the monetary gadget used. To set up the real role, the finances
holder will want to take a look at and recognize the monetary statistics available. They will
want to recognize how cutting-edge the statistics is and alter it for any exceptional
transactions. These might also additionally consist of borrowers and creditors. The finances
holder may even want to recognize if any a part of their finances has been “committed” –
i.e. if items and offerings had been ordered however now no longer but received. Therefore,
relying at the corporation, organising the real role might also additionally require statistics
from numerous exclusive sources.

Step 2 – Compare Actual with Budget

After finishing Step 1, the statistics collected wishes be as compared to the budgeted figures
set at the start of the monetary year. This evaluation have to be easy if the real profits and
expenditure headings fit people who have been initially set. The distinction among the real
profits and expenditure and the budgeted profits and expenditure is referred to as a
“variance”. Variance evaluation is an essential method with inside the budgetary manipulate
method. Variance evaluation is mentioned in element in a number of our different assets,
together with our book “Managing the Devolved Budget”. We actually have a excellent on-
line route at the UDEMY platform referred to as “Managing Budgets with inside the Public
and Non Profit Sector” and is the reason variances clearly.

Step 3 – Calculating Variances

In the context of budgetary control, the term variance refers to the difference between
actual and budget (planned) income and expenditure. An example of a variance is shown as
follows: month 6

Budget heading Budget to date Actual to date Variance

(Expected (Actual spend) +/(-)
spend)

Salaries £120,000 £132,000 (£12,000)

The above instance suggests that via way of means of month six the budgeted expenditure
on salaries became set at £120,000. However, the real spending on salaries in the ones six
months totalled £132,000. The distinction among those figures is £12,000. This represents
the variance from the price range. In this situation the variance is negative. The brackets
constitute over spending. The “price range to date” column suggests the quantity of price
range that must were spent via way of means of month 6. Ideally, the price range might be
“profiled” to mirror the sample of expenditure over the year. Therefore, while the real
expenditure for that length is in comparison with the price range, the actual variance may
be calculated. There are different variance calculations techniques that may be utilized in
supporting the price range holder to govern the price range. As cited in Step 2, we've got
different assets that speak this subject matter in in addition detail.

Step 4 – Establish Reasons for Variances

There are numerous motives which can account for variations located among the budgeted
and real expenditure. The motives for all variances desires to be identified. This manner is
vital to powerful budgetary control, because the price range holder desires to recognize
while it's far suitable to take corrective action. Variances may be each high-quality and
negative, reflecting extra spending or below spending, or over/below overall performance
on income. All require investigation. The motives for variances might also additionally
include:

 Error Incorrect figures entered at the accounting system

 Delays in coming into statistics at the accounting system
  Profiling Often wrong finances profiles are entered, which undergo no relevance to
the sample of real expenditure and earnings (e.g. no account taken of seasonal
fluctuations)
 Poor budgeting Little attention given to preliminary finances preparation
 Unplanned modifications For example, will increase and reduces in call for for
services, or creation of latest legislation

Step 5 – Take Action

Budgets can handiest be managed if corrective movement is taken in reaction to the

variances. Sometimes the reason for the variance effects in no movement being required.
For example, timing differences. This is wherein the variance will decrease over the years
because the real earnings and expenditure figures evidently fit up with the finances.
Variances that get up due to essential modifications, along with an growth in call for for a
service, require movement. This is vital to regain budgetary control.

Types of budgets:

1. Sales budget
2. Raw material consumption budget
3. Raw material purchase budget
4. Production Budget
5. Labour cost budget
6. Production overhead budget
7. Administration overhead budget
8. Selling & distribution overhead budget
9. Flexible budget
10. Cash budget
11. Master Budget

Key Differences Between Fixed and Flexible Budget

BASIS Fixed Budget Flexible Budget

1.Meaning Fixed budget remain fixed Flexible budget is the
(constant) at all time and budget which is flexible
situations. enough to change as per the
prevailing circumstances.
2.Rigid Attitude It t is rigid in the sense that It is not rigid in the sense
it doesn't change even in that it changes its cost
abnormal circumstances. structure acc. to the output
actually obtained.
3.Unrealistic Assumption It is based upon unrealistic It is realistic in the sense
assumption that there will that it has the feature to
not be any change in the adjust itself as per the
future circumstances & relevant circumstances
 budgeted target can be
achieved in very smooth
manner
4.Variance Analysis Due to lack of flexibility, it is It is very helpful in
of no help to the identification of variances
management for and fixation of
computation of variances responsibilities.
5.Decision making If there is huge difference in In case of flexible budget
budgeted and actual ,the budgeting procedure
performance, the whole would not fail because
budgeting procedure would necessary adjustments can
fail in case of fixed budget be made for comparision of
parameters. budgeted and actual
performance.