Lee Company

Cost and Managerial Accounting

Cost and Managerial Accounting

Task 1

Lee Company significantly needs the knowledge of costs and their volumes to establish profitable sales price that are workable over a period of time. Management would be aided in devising an effective pricing strategy through the knowledge of future costs and the allowances for changing sales and production and the pricing strategy would ensure the recovery of costs through sales prices and securing profits under adverse conditions. Further, since Lee Company manufactures three different products, it would need cost information for setting the prices of the products as different products would be consuming different resources (Drury, 2008, p. 248).

Sales Budget

 

A

B

C

Budgeted Sales (Unit)

2000

4000

3000

Unit Price (£)

100

130

150

Budgeted Sales (£)

200000

520000

450000

Production Budget

 

A

B

C

Budgeted Sales (Unit)

2000

4000

3000

Desired Ending Stock

600

1000

800

Total Needs

2600

5000

3800

Less: Beginning Stock

500

800

700

Budgeted Production (Units)

2100

4200

3100

Raw Materials Usage Budget

RM 11

RM 22

RM 33

Raw materials for A

10500

4200

0

Raw materials for B

12600

8400

8400

Raw materials for C

6200

3100

9300

Total Raw materials usage (units)

29300

15700

17700

Raw Materials Purchases Budget

RM 11

RM 22

RM 33

Total Raw materials usage (units)

29300

15700

17700

Closing Stock of raw materials

18000

9000

12000

Total Raw materials required

47300

24700

29700

Opening Stock of raw materials

21000

10000

16000

Total raw materials purchases (units)

26300

14700

13700

Standard costs per unit (£)

5

3

4

Total cost for raw material purchases(£)

131500

44100

54800

Labour Budget

 

A

B

C

Budgeted Production (Units)

2100

4200

3100

Standard labour hours per product

4

6

8

Total budgeted labour hours

8400

25200

24800

Total budgeted labour costs (£)

50400

151200

148800

Total Budgeted labour hours =8400+25200+24800=58400 hours

Budgeted Fixed overhead =£292,000

Budgeted Overhead absorption rate =£292,000/58400 hours=£5 per labour hour

Task 2

Variance could be resulting in the raw materials usage and purchases and labour budget due to a variance in expected sales or increase in supplies prices or labour costs. In order to minimize these effects, the company could either select low-cost suppliers or increase its sales prices so as to accomdate the increase in costs. The company could also execute process improvement or focus on waste reduction thereby increasing its productivity and decreasing costs.

Increase in Labour Hourly Rate

Increase in the hourly labour rate would be an unfavourable condition for the company as it would indicate a rise in the costs incurred by the company as more would be paid to the workers and hence less profitability for the company.

Increase in Sales

This would be a favourable variance for the company as more income would be generated from sales which would contribute towards more net income for the company than expected. All this would result in greater than budgeted income of the company and hence more profitability which would be a favourable condition.

Purpose of Budgeting

The process of budgeting involves planning how much is to be spent and how much is to be saved by a company. A budget is a comprehensive financial plan that sets how operational and financial objectives of a company would be achieved. Every business benefits from budgeting by planning its future revenues, expenses, earnings, cash inflows and outflows. A careful and comprehensive budgeting process would result in a comprehensive budget. Such a budget would enhance management perspectives, would inform earlier about anticipated problems, aid in better coordination of activities, and aid in evaluating performance (Gowthrope, 2005, p. 167).

In order to evaluate the budgetary monitoring process, it is assessed that to what extent the budget estimates matches the actual ...