Business Accounting for Cakes for Occassions Limited

Case Study

You are a junior member of staff, in a medium sized firm of accountants, you started about six months ago and are training.

Your Manager has asked you, as studying is fresh in your mind, to provide background information for a report he is going to write to justify and explain the nature and need for proper management accounting for a client.

The client is a small business Cakes for Occasions Limited (C4O) it specialises in producing speciality cakes for occasions such as weddings, birthdays and christenings. They have a small bakery with 45 staff, including managers, who manufacture the products and do all administration.

Task

You have been asked to write a memo for your manager, covering some of the questions the client has asked. This will then be used as the basis of a report for the client, which your manager will produce at a later date.

You are to include examples; there is guidance in the appendices provided, to illustrate the usefulness of management accounting. These completed appendices with workings, should be attached to the end of the memo as they will not be part of the word count

You are required to clarify areas where the client is unsure of the use of management accounting and complete examples given by your senior, to illustrate best practise in using your management accounting skills.

Your memo should cover the following five areas, guidance is provided for each part:

1. Management accounting

Management accounting covers a number of different aspects of the business,it has fundamental differences to the financial accounting discipline, including examples using C4O Ltds business your memo should include:

• An explanation of four main areas of management accounting which make it different to financial accounting.
• Define cost centres, justify and provide examples of a simple cost centre structure which would be useful for management accounting for C4O Ltd.

2. Cost types and behaviour

Some businesses take great effort to distinguish between fixed and variable costs it is important to be able to define and explain the nature of cost behaviour to C4O Ltd. Explain a number of aspects of cost behaviour in the context mentioned below:

• Define variable costs and fixed costs and provide a suitable example of each for C4O Ltd
• Detail three assumptions underlying the principles of basic cost behaviour and provide a labelled graph of semi-variable costs in Appendix 1 and explain how the assumptions you have chosen are illustrated in the graph.
• C4O Ltd management are worried about using past cost behaviour patterns to predict confidently accurate costs for budgeting. Refer to your answer to 2.4, the calculations in your appendix, in your memo and explain one fact with regard to the data, which would make you more confident in the accuracy of your prediction and one fact with regard to the data, which would reduce your confidence in the accuracy of your answer.
• Complete the example in Appendix 1 to illustrate the use of cost behaviour concepts to predict budgeted costs. Incorporate the answer into your memo using it as an appendix and referring to it in your memo above in 2.1, 2.2 and 2.3

3. Absorption Costing

Costing methods vary, the fundamental costing methods are absorption and marginal costing.

• Define full absorption costing and marginal costing.
• Explain two fundamental differences between these two costing methods.
• Illustrate the usefulness of full absorption costing by completing Appendix 2. Incorporate the answer into your memo using it as an appendix and referring to it in your memo above in 3.2

4. Marginal costing and Break-Even-Analysis

Decision making, in particular cost volume profit analysis, is an important part of management accounting.

• Explain what the break-even point, break-even revenue and margin of safety are, why they are useful to C4O Ltd, refer to your answer to 4.2, the calculations in your appendix, in your memo
• Calculate break-even point, beak-even revenue, contribution as required and margin of safety in Appendix 3. Incorporate the answer into your memo putting calculations into the appendix and referencing to the appendix in your memo above in 4.1.

5. Budgeting and variances

Budgets are important for small businesses such as C4O Ltd, but they have to be planned correctly. C4O Ltd have provided you with details of expected sales and costs for the first week of next month, using marginal costing.

They have requested you to convert this information into a set of basic operating budgets.

They would also like to more fully understand, what budgets are and an idea of what are important issues when constructing operating budgets. To do this include in your memo the following:

• Provide a definition of a budge

• Explain two issues which must be considered when producing operating budgets, similar to the one in Appendix 4, refer to Appendix 4 when explaining the issues you consider.

• Produce the Operating Budget and Standard Cost in Appendix 4. Incorporate the answer into your memo putting calculations into the appendix and referencing to the appendix in your memo above in 5.2

• Calculate the variances as listed in Appendix 4. Incorporate the answer into your memo using it as an appendix and referring to it in your memo below in 5.5
• Explain one reason each variance you have calculated may occur for C4O Ltd, refer to your answer to 5.4, the calculations in your appendix, in your memo.

To: The Manager

From: Siluzia FerrazMilengo

Priority: High

Date: 19 August 2014

Subject: Cakes for Occasions Limited (C4O) – Accounting clarifications

Discussion:

This memorandum will discuss various background information issues related to business accounting such as; the fundamental difference between business accounting and financial accounting; cost type and their behavior; absorption costing and budgeting & variance analysis. It is described that how cost behavior under various cost centers is giving the budgeted cost to finally prepare the budget for C4O Ltd.

Description of cost types, behavior and discussion on budgeting

1.1  Management Accounting

Accounting system takes note of economic activities happening in an organization. On the basis of information supplied by accounting system, different stake holders take actions for their benefits. One stakeholder is managers, using this information for the sake of administering the business activities in an organization. This is known as management accounting.

Difference between financial accounting and Management accounting

The goals of both are basically different. Management accounting helps managers in decision making, implementing the strategy; provides the way of performing a job in better way; and in doing cost-benefit analysis. Financial accounting mainly focuses on providing information to the external stakeholders. The main differences are given below.

1.2. Cost centers and their use in management accounting

In every organization to maintain coordination and achieving the goal, various responsibility centers like cost center, revenue center, profit center and investment center is opened where and the accountability of each center is given to the manager for managing and control purposes. A cost center is a responsibility center where the manager is accountable for the costs only. Cost center incurs costs and does not directly participate in the profit of the business. It even doesn't participate directly in the revenue generation.