Task 01

Our top food and beverage manufacturer has exciting potential with the projected launch of a
new herbal beverage, according to the product development team. I will offer a thorough cost
categorization for this proposed product as the management accountant to support strategic
choice-making.

Direct Costs

These include expenses for labor, packaging, and raw materials that are directly related to
production. Direct expenses include things like the cost of the herbs used in the product, the
salary paid to the employees on the assembly line, and the cost of the customized packaging.

Indirect Costs

Unrelated charges that are necessary for the running of the industrial process are known as
indirect costs. These expenses include overhead expenditures such as rent for the plant, utilities,
and machinery upkeep. Regardless of production volume, indirect expenses are incurred and
distributed among several goods or activities. Indirect expenses include things like the power
required in the manufacturing facility and the cost of maintaining the production machinery.

Manufacturing Costs

Manufacturing expenses include all direct and indirect expenses related to producing the herbal
beverage. These expenses cover both the direct costs of the materials and labor used in the
production process as well as the indirect costs associated with running the manufacturing
facility. The entire costs involved with producing anything can be estimated from
manufacturing costs.

Non-Manufacturing Costs

Non-manufacturing expenditures are expenses that are necessary for basic business operations
but do not directly contribute to the development of the herbal beverage. These expenses
include administrative, sales, and marketing fees, as well as R&D expenses. Non-
manufacturing expenses are required for the promotion of a new product, ensuring compliance,
and maintaining successful business operations.
Fixed Costs

Fixed costs are expenses that don't change based on the volume of output. These expenses
cover things like rent, the wages of permanent employees, and depreciation of equipment.
Whether or whether the herbal drinking product is created, fixed expenses are incurred. These
expenses are essential to consider when setting prices even if the teams responsible for product
development and marketing have no immediate control over them.

Variable Costs

Variable costs fluctuate proportionately with changes in production volume. These charges
include raw materials, direct labor costs, and production-related expenses that vary with the
number of units produced. knowledge of how variations in production levels affect total costs
and profitability requires a knowledge of variable costs.
Task 02
2.1. Income Statement - March 2021

2.1.1. Marginal Costing Method

Particulars Amount (Rs.)

Sales 20,000
Cost

- DM 3,200
- DL 2,000
- Variable Production Overheads 1,500

TVC 6,700
CM 13,300
FC
FPO 4,000
- FS Expenses 4,000
- FA Expenses 2,000
Total Fixed Costs 10,000
Net Profit 3,300

2.1.2. Absorption Costing Method

Particulars Amount (Rs.)

Sales 20,000.00
Cost
- Opening Inventory (0 units) -
- DM (3,200.00)
- DL (2,000.00)
- VPO (1,500.00)
TVC 6,700.00
Fixed Production Overheads (4,000.00)
 Total Costs 10,700.00
Gross Profit 9,300.00
Selling Expenses:
- Fixed Selling Expenses (4,000.00)
- Variable Sales Commission (1,000.00)
Total Selling Expenses 5,000.00
Net Profit 4,300.00

2.2. Marginal Costing vs Absorption Costing

Marginal Costing

• When computing the cost of products sold, marginal costing includes only variable
expenses (direct materials, direct labor, and variable manufacturing overheads).
• Fixed production overheads are handled as period expenses rather than product costs.
• Fixed costs are classified as independent expenses on the income statement and are
subtracted directly from the contribution margin to calculate net profit.

Absorption Costing

• In the cost of goods sold, absorption costing comprises both variable and fixed
manufacturing overheads.
• Fixed production overheads are spread across units produced, raising the cost per unit
and lowering the gross profit.
• The net profit is calculated by adding fixed selling expenditures, variable sales
commission, and other charges to the gross profit.
• This technique provides a more thorough perspective of product costs, but it is
susceptible to variations in production levels.
Task 03
3.1. Zero-Based Budgeting
Despite its time-consuming nature, the notion that zero-based budgeting (ZBB) is the best
budgeting strategy is controversial. Every planned cost must be justified from the beginning,
regardless of whether it was incurred in the prior quarter. While this strategy encourages cost-
consciousness and can result in effective resource allocation, its suitability is dependent on the
unique organizational environment and goals.

ZBB supporters believe that its rigorous expenditure review compels departments to rigorously
analyze their needs, perhaps revealing redundancies and wasteful processes. This can lead to
better resource allocation and the removal of non-essential expenses, resulting in enhanced
operational efficiency. However, its time-consuming nature presents difficulties. ZBB requires
managers to devote significant time and effort to justifying each spending in detail. This might
divert attention away from strategic planning and implementation in businesses with limited
resources or those focused on short-term goals.

Finally, while zero-based budgeting can promote cost-consciousness and resource efficiency,
its suitability is dependent on criteria such as organizational goals, industry features, and
available resources. While it might be the most appropriate method in some cases, a blanket
statement proclaiming its superiority must be considered in the context of individual
organizations.

3.2. Budgeting

3.2.1. Budgeting Techniques

Sales Budget

Selling Total Sales

Product Units Sold
Price (Rs.) (Rs.)
Venus 8500 400 3,400,000
Texas 1600 560 896,000
Production Budge

Units Desired
Total Units Units to
Product Needed for Ending
Required Produce
Sales Inventory
Venus 8500 170 8670 8650
Texas 1600 90 1690 1600

Material Purchase Budget

Material Total Ending

Beginning
Material Required per Material Inventory Material to
Inventory Purchase
Unit Required Required
Material
10 units
1 86,500 8,500.00 10,200.00 87,700.00
Material
9 units
2 14,490 8,000.00 1,700.00 14,090.00

Direct labor Budge

Direct Labor Total Direct Direct Labor

Product Hours per
Labor Hours Cost (Rs.)
Unit

Venus 10 hours
86,500.00 1,038,000.00

Texas 15 hours
24,000.00 288,000.00
Cash Budget

Receipts Payments Other

Payments Cash
from for Costs and
Quarter for Wages Net Cash Balance
Customers Materials Expenses Flow (Rs.)
(Rs.) (Rs.)
(Rs.) (Rs.) (Rs.)
Q1 1,000,000 400,000 400,000 120,000 80,000 118,000
Q2 1,200,000 480,000 440,000 100,000 180,000 298,000
Q3 1,120,000 440,000 480,000 72,016 127,984 426,984
Q4 985,000 547,984 646,188 13,642 -222,814 204,170

3.2.2. Budget Committee Meeting

The company's predicted performance would most likely be reviewed during the budget
committee meeting based on the budgeted and actual data supplied. Variations in direct material
costs, labor efficiency, and sales price that are favorable may suggest efficient resource usage
and effective pricing strategies. Negative variations in labor rates, variable overheads, and sales
volume, on the other hand, may create worries about cost management, worker productivity,
and market demand. The committee would investigate these discrepancies and assess the
company's capacity to adjust to changing conditions. Overall, the company's performance
discussion would be on lowering costs, improving operational efficiency, and aligning plans to
meet financial targets.
Task 04
4.1. Variances
Direct Material Variances:

a. Direct Material Cost Variance:

= 74,000 kg * (Rs. 11.20 - Rs. 10.80)

= Rs. 29,600 (Favorable)

b. Direct Material Usage Variance:

= Rs. 10.80 * (8,000 kg - 74,000 kg)

= Rs. 6,480 (Adverse)

Direct Labor Variances:

a. Direct Labor Rate Variance:

= 10,800 hours * (Rs. 19.00 - Rs. 18.00)

= Rs. 10,800 (Adverse)’

b. Direct Labor Efficiency Variance:

= Rs. 18.00 * (10,000 hours - 10,800 hours)

= Rs. 14,400 (Favorable)

Variable Overhead Variances:

a. Variable Overhead Expenditure Variance:

= Rs. 70,000 - (10,800 hours * Rs. 6.00)

= Rs. 4,800 (Adverse)

b. Variable Overhead Efficiency Variance:

= Rs. 6.00 * (10,000 hours - 10,800 hours)

= Rs. 4,800 (Favorable)

Fixed Overhead Variances:

a. Fixed Overhead Expenditure Variance:

= Rs. 170,000 - Rs. 168,000

= Rs. 2,000 (Favorable)

Sales Variances:

a. Sales Price Variance:

= 9,000 units * (Rs. 184 - Rs. 180)

= Rs. 36,000 (Favorable)

b. Sales Volume Variance:

= 10,000 units * (Rs. 180 - Rs. 116)

= Rs. 640,000 (Adverse)

4.2. Summary of Total Cost Variances

Summary of Total Cost and Sales Variances:

Total Direct Material Variance:

= Rs. 29,600 (Favorable) - Rs. 6,480 (Adverse)

= Rs. 23,120 (Favorable)

Total Direct Labor Variance:

= Rs. 10,800 (Adverse) + Rs. 14,400 (Favorable)

= Rs. 3,600 (Favorable)

Total Variable Overhead Variance:

= Rs. 4,800 (Adverse) - Rs. 4,800 (Favorable)

= Rs. 0 (Net Variance)

Total Fixed Overhead Variance:

= Rs. 2,000 (Favorable) + Unknown (Efficiency Variance not given)

Total Sales Variance:

= Rs. 36,000 (Favorable) - Rs. 640,000 (Adverse)

= Rs. 604,000 (Adverse)

4.3. Possible Causes and Corrective Actions for Adverse Variances

Direct material usage variation

o Possible causes include inefficient material use, inadequate quality control, and
imprecise measurements.
▪ Corrective Actions: strengthen staff training, strengthen quality control methods, and
constantly monitor material utilization.

Variation in Direct Labor Rates:

o Possible causes include wage rate fluctuations, skill mismatches, and inefficient labor
allocation.
▪ Corrective Actions: Analyze salary structure, give skill enhancement training, and
guarantee optimal worker distribution.

Variance in Variable Overhead Expenditure:

o Possible causes include an unanticipated increase in variable overhead expenses and

inadequate cost control.
▪ Corrective Actions: Review and limit overhead expenditures on a regular basis,
negotiate with suppliers, and look for cost-cutting options.
Variance in Fixed Overhead Expenditure:

o Possible causes include unanticipated fixed overhead expenditures and cost

management inefficiencies.
▪ Corrective Actions: Closely monitor fixed expenses, identify areas of overspending,
and adopt cost-cutting solutions.

Variation in Sales Volume:

o Possible explanations include lower-than-expected demand, market rivalry, and

external reasons.
▪ Corrective actions include analyzing market trends, revising marketing strategy, and
diversifying product offers.

A detailed investigation of the fundamental causes is required for any remedial action. Regular
monitoring of processes, budgets, and performance can aid in the early detection of problems.
Communication and teamwork within divisions are essential for efficiently addressing
differences. As a result, resolving unfavorable variations successfully requires a balanced
strategy that considers both internal and external influences.
Conclusion

This document examines accounting, costing, and budgeting in a food and beverage
manufacturing company, emphasizing strategic decision-making, precise cost categorization,
income statement evaluation using marginal and absorption costing methods, zero-based
budgeting, and examining cost and sales variances. Comparing marginal and absorption costing
techniques shows how various approaches affect product cost allocation and profitability.
Accounting and costing are essential for comprehending a company's financial picture.
Budgeting is necessary for efficient resource allocation and goal attainment, and while time-
consuming, zero-based budgeting encourages cost-consciousness. The significance of
performance monitoring and correcting deviations from intended results is shown by analyzing
variations in direct material and labor expenses as well as sales.

Possible reasons and solutions for negative deviations highlight the importance of ongoing
watchfulness, quality control, effective resource management, and market dynamics adaption.
In a food and beverage production firm, accounting, costing, and budgeting all work together
to help with strategic decision-making, operational effectiveness, and financial success.