UNIVERSITY COVER PAGE
London South Bank UnMMiversity
School of Business
Module Title: Managerial Accounting
Module Code: AFE_4_MAC
Coursework - Managerial Accounting Report
Student Name: Vivek Panchal
Student ID: s4432638
Lecturer: Ibrahim Ganiyu
Submission Date: 3 April 2026
Word Count:
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INTRODUCTION
Management accounting is the process of analysing the financial and non-financial
information used by the management of an organisation in taking managerial decisions. It
helps the organisation measure its financial performance and supports its strategic decisions
by providing relevant and reliable cost information.
This report mainly talks about three main areas of accounting, which are cost
classification, overhead allocation, and budgeting. For knowing the behaviour of different
types of costs as well as the impact of costs on making decisions and formulating pricing
strategies, cost classification is the key. On the other hand, accurate cost allocation and
apportionment of overhead costs among departments ensure that the product costs show
the true consumption of resources.
Lastly, budgeting which is mainly seen as a planning tool as it estimates future revenues
and expenditures systematically in an easy manner. Overall, this whole report critically
examines these concepts and links them with their real-life application through numerical
examples and analysis for organisational decision-making.
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1.1. COST CLASSIFICATION AND OVERHEAD ALLOCATION
1.1.1. Cost Classification
Cost classification refers to the process of grouping costs into different categories on the
basis of their characteristic such as behaviour, function and element, in order to do planning,
controlling and decision making by internal management in the organisation. (Drury, 2018)
1.1.1.1. Cost Classification by Behaviour:
Fixed Costs:
According to Drury (2018), “Fixed costs are the costs that remain constant regardless of
the level of production or operational activity in the short run and are incurred over a period
of time.” However, understanding their behaviour is important as high fixed costs increase
leverage and risk when demand fluctuates. Examples include factory rent, administrative staff
and insurance. Understanding fixed costs helps managers in making budgets and break-even
analysis as higher fixed costs results in financial uncertainty and thus require higher revenue
to maintain profitability. (Drury, 2018)
Variable Costs:
As noted by Atrill and McLaney (2019), “variable costs changes in direct proportion to
the fluctuations in the level of the activity.” Examples include costs like packaging and rawmaterial costs that rise as more units are produced. Examining variable costs helps managers
assess contribution margin to make short-term decisions regarding pricing, cost control, and
average production threshold. (Drury, 2018)
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Semi-variable Costs:
Semi-variable costs include both, fixed as well as variable components. One part of this
cost remains constant while the other part of the cost is incurred as per the level of the
activity. Managers have to separate both the components of semi-variable costs in order to
take better budgeting decisions or carry out cost volume profit analysis. Examples of semi
variable costs include factory electricity or storage/ warehouse rent. (Drury, 2018)
1.1.1.2. Cost Classification by Traceability:
Direct Costs:
Direct costs are the costs that can be traced directly to the products/service/units
produced or provided. Its core examples include direct raw material costs and direct labour
costs. In order to determine product costs and assess profitability of individual units, direct
costs are assessed by managers. This enables accurate product costing and profitability
analysis, supporting effective pricing and product-line decisions. (Drury, 2018)
Indirect Costs:
The costs that cannot be directly traced to a single product or service produced/provided
are indirect costs and thus are required to be allocated to specific departments, products or
projects that benefit from these costs. Examples include manager’s salary, machinery
depreciation and maintenance, etc. If these costs are not allocated properly, then it can lead
to over-or-under-costing leading to incorrect profit analysis.
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1.1.1.3. Cost Classification by Function:
Production Costs:
Production costs refer to the expense incurred by the business in the manufacturing of
goods and services. These include direct material, direct labour and production overhead
required in order to transform raw material into finished goods. Managers analyse production
costs in order to manage production efficiency and determine product pricing.
(Atrill and McLaney, 2017)
Administration Costs:
Administrative costs are incurred in order to manage and coordinate the overall
operational activities in the organisation. Although, these expenses are not directly related to
production, excessive administration costs can make a significant reduction in overall
organisational profitability. Examples include printing and postage, office rent, stationery or
accounting fees. (Atrill and McLaney, 2017)
Selling & Distribution Costs:
Selling and distribution costs are the expenses incurred by the business unit in order to
promote, market, sell and deliver the products/services to customers. Examples include
salesman fees/salary, advertisement, and transportation costs. Managers evaluate these costs
in order to manage distribution and ensure marketing effectiveness and enhance the
contribution of sales in profitability. (Atrill and McLaney, 2017)
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1.2. Importance of Allocating Overheads
When calculating the total production costs, all shared costs are logically allocated to
both the production and service cost centres. This is called allocation of overhead costs. It
helps the organisations calculate accurate cost of production resulting in making more
informed managerial decisions. Production overhead costs consist of various indirect costs,
such as utilities, supervisor salaries, factory rent and heating and lighting charges that cannot
be directly traced to individual units/products produced. Therefore, these costs must be
allocated to specific cost centres on some specific basis, such as labour hours, machine hours
or floor area. Drury (2019) states that “overheads must be apportioned on a reasonable basis
to ensure accurate product costing.” However, service departments do not produce goods
directly but helps production department in manufacturing. Thus, costs accumulated in those
departments must be re-apportioned to production departments as it ensures that all costs
are absorbed in the production resulting in an accurate measure of total cost of production.
Accurate overhead allocation ensures that cost of the product is reliable and that
management decisions subject to pricing, budgeting and analysis of profit are based on
accurate financial information. (Srivastava and Kirche, 2024)
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1.2. Allocation, Apportionment, Re-apportionment and
Unit Cost of Production:
1.2.1. Allocation and Apportionment of Overhead Costs:
Here, overhead costs for Bucks Ltd. are allocated and apportioned between production
and service departments on appropriate basis.
1.2.1.1. Basis of Allocation and Apportionment Table:
Overhead Costs
Basis of Apportionment
Rent and Rates
Floor Area
Lightning and Heating
Floor Area
Depreciation of Machinery
Machine Value
Insurance of Machinery
Machine Value
Supervisors Salary
Employees
Building Insurance
Floor Area
Costs Centres
Production
Departments
Service
Departments
Total
Machining
Finishing
Stores
Maintenance
350
200
120
100
770
45
15
-
-
60
800
650
50
20
1,520
Floor Area (Sq.
Metres)
Number of
Production Staff
Value of
Machinery (£’000)
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1.2.1.2. Allocation and Apportionment of Overheads Table:
Overhead
Costs
Rent and
Rates
Lightning
and Heating
Depreciation
of
Machinery
Insurance of
Machinery
Supervisors
Salary
Building
Insurance
Total
Amount
to
Basis of
Production Departments
be
Allocated
Machining
(£)
Apportionment
(£)
Finishing (£)
Service
Departme
Stores
(£)
Maintena
(£)
175,000
Floor Area
79,545.45
45,454.55
27,272.73 22,727.27
80,000
Floor Area
36,363.64
20,779.22
12,467.53 10,389.61
70,000
Machine Value
36,842.11
29,934.21
2,302.63
921.05
120,000
Machine Value
63,157.89
51,315.79
3,947.37
1,578.95
75,000
Employees
56,250.00
18,750.00
-
-
35,000
Floor Area
15,909.09
9,090.91
5,454.55
4,545.4
555,000
-
288,068.18
175,324.68 51,444.81
40,162.3
1.2.1.3. Example of Overhead Apportionment:
= Apportionment of Rent and Rates to Machining Department
= (350  770)  175,000
= 79,545.45
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1.2.2. Re-apportionment of Overhead Costs:
Here, the costs apportioned to services departments are re-apportioned
to production departments on the given percentage basis.
1.2.2.1. Basis of Re-apportionment Table:
Service
Department
Machining (%)
Finishing (%)
Stores
70
30
Maintenance
50
50
1.2.2.2. Re-apportionment of Overheads Table:
Overheads
Production
Centre
Service
Centre
Machining
Finishing
(£)
(£)
Store (£)
(£)
288,068.18
175,324.68
51,444.81
40,162.34
36,011.37
15,433.44
(51,444.81)
-
20,081.17
20,081.17
-
(40,162.34)
344,160.72
210,839.29
0
0
Maintenance
Re-apportionment of
Stores
Re-apportionment of
Maintenance
Total Production
Overhead Cost
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1.2.2.3. Example of Overhead Re-apportionment:
= Re-apportionment of store department cost to machining department:
= 51,444.81  0.70
= 36,011.37
1.2.3. Unit Cost of Production:
Here, the cost of producing one single unit is calculated using the marginal costing as
well as absorption costing method.
1.2.3.1. Direct Costs:
Direct Material Cost/Unit = £3.50
Direct Labour Cost/Unit = 4 X 35
= £140
1.2.3.2. Overhead Absorption Rate:
Total Working Hours of Each Worker/Year = 33 X 50
= 1,650 Hours
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