AMSTERDAM • BOSTON • HEIDELBERG • LONDON • NEW YORK • OXFORD PARIS • SAN DIEGO • SAN FRANCISCO • SINGAPORE • SYDNEY • TOKYO

Pergamon Flexible Learning is an imprint of Elsevier

superseries

Working withCosts and BudgetsFIFTH EDITION

Published for theInstitute of Leadership & Management

Institute of Leadership & Management

Prelims-I046430.qxd 4/21/07 6:25 PM Page i

Pergamon Flexible Learning is an imprint of ElsevierLinacre House, Jordan Hill, Oxford OX2 8DP, UK30 Corporate Drive, Suite 400, Burlington, MA 01803, USA

First edition 1986Second edition 1991Third edition 1997Fourth edition 2003Fifth edition 2007

Copyright © 1986, 1991, 1997, 2003, 2007 ILM. Published by Elsevier Ltd. All rights reserved

Editor: David Pardey

Based on material in previous editions of this work

The views expressed in this work are those of the authors and do not necessarily reflect those of the Institute of Leadership &Management or of the publisher

No part of this publication may be reproduced, stored in a retrieval system or transmitted in anyform or by any means electronic, mechanical, photocopying, recording or otherwise without theprior written permission of the publisher

Permissions may be sought directly from Elsevier's Science & Technology Rights Department in Oxford, UK: phone (�44) (0) 1865 843830; fax (�44) (0) 1865 853333; email: permissions@elsevier.com. Alternatively you can submit your request online by visiting the Elsevier website athttp://elsevier.com/locate/permissions, and selecting Obtaining permission to use Elsevier material

NoticeNo responsibility is assumed by the publisher for any injury and/or damage to persons or property as a matter of products liability, negligence or otherwise, or from any use or operation of any methods, products, instructions or ideas contained in the material herein

British Library Cataloguing in Publication DataA catalogue record for this book is available from the British Library

Library of Congress Cataloguing in Publication DataA catalogue record for this book is available from the Library of Congress

ISBN 978-0-08-046430-5

For information on all Pergamon Flexible Learning publications visit our website at http://books.elsevier.com

Institute of Leadership & ManagementRegistered Office1 Giltspur StreetLondonEC1A 9DDTelephone: 020 7294 2470www.i-l-m.comILM is a part of the City & Guilds Group

Typeset by Charon Tec Ltd (A Macmillan Company), Chennai, Indiawww.charontec.comPrinted and bound in Great Britain

07 08 09 10 11 10 9 8 7 6 5 4 3 2 1

Prelims-I046430.qxd 4/21/07 6:25 PM Page ii

Contents

Series preface vUnit specification vii

Workbook introduction ix1 ILM Super Series study links ix2 Links to ILM qualifications ix3 Links to S/NVQs in Management ix4 Workbook objectives x5 Activity planner xi

Session A Classifying costs 11 Introduction 12 Organizational costs 23 Labour costs 34 Materials costs 45 Overheads 56 Fixed and variable costs 87 Break-even analysis 98 The need to control costs 139 Summary 18

Session B Standard costing 191 Introduction 192 Setting standards 193 Standard costing in practice 234 Variances from standard 265 The value of standard costing 316 Summary 33

iii

Prelims-I046430.qxd 4/21/07 6:25 PM Page iii

Session C Controlling and reducing costs 351 Introduction 352 Cost information and decisions 353 Cost centres 404 Control through cost centres 445 Cost consciousness 546 Checklists for controlling costs 617 Cost reduction 658 Summary 69

Session D What is a budget? 711 Introduction 712 The purpose of budgets 723 Beginning a budget 754 Why do we need budgets? 775 The advantages of budgets 796 Using budgetary control 817 Summary 84

Session E Monitoring performance against budget 851 Introduction 852 Budgetary control 863 Flexible budgets and budgetary control 964 Non-financial budgets 1015 Standard costing and budgetary control 1026 Summary 106

Performance checks 1071 Quick quiz 1072 Workbook assessment 1103 Work-based assignment 111

Reflect and review 1131 Reflect and review 1132 Action plan 1183 Extensions 1204 Answers to self-assessment questions 1215 Answers to activities 1246 Answers to the quick quiz 1267 Certificate 128

Contents

iv

Prelims-I046430.qxd 4/21/07 6:25 PM Page iv

v

Series preface

Whether you are a tutor/trainer or studying management development to further your career, Super Series provides an exciting and flexible resourceto help you to achieve your goals. The fifth edition is completely new and up-to-date, and has been structured to perfectly match the Institute ofLeadership & Management (ILM)’s new unit-based qualifications for first linemanagers. It also harmonizes with the 2004 national occupational standardsin management and leadership, providing an invaluable resource for S/NVQsat Level 3 in Management.

Super Series is equally valuable for anyone tutoring or studying any managementprogrammes at this level, whether leading to a qualification or not. Individualworkbooks also support short programmes,which may be recognized by ILMas Endorsed or Development Awards, or provide the ideal way to undertakeCPD activities.

For learners, coping with all the pressures of today’s world, Super Series offersyou the flexibility to study at your own pace to fit around your professionaland other commitments. You don’t need a PC or to attend classes at a specifictime – choose when and where to study to suit yourself ! And you will alwayshave the complete workbook as a quick reference just when you need it.

For tutors/trainers, Super Series provides an invaluable guide to what needsto be covered, and in what depth. It also allows learners who miss occasionalsessions to ‘catch up’ by dipping into the series.

Super Series provides unrivalled support for all those involved in first linemanagement and supervision.

Prelims-I046430.qxd 4/21/07 6:25 PM Page v

Prelims-I046430.qxd 4/21/07 6:25 PM Page vi

vii

Unit specification

Title: Working with costs and budgets Unit Ref: M3.27

Level: 3

Credit value: 1

Learning outcomes Assessment criteria

The learner will The learner can (in an organization with which the learner is familiar)

1. Know how to 1.1 Explain the importance of agreeing to a budget and operating work to a budget within it

1.2 Describe a method to monitor variance between actualperformance and budget

1.3 Explain how information used in determining and/or revisingbudgets is gathered

2. Understand costs 2.1 Explain fixed and variable costs; and the concept of break even in relation to the organization

2.2 Explain the purpose and nature of basic cost statements2.3 Explain the value of standard costing and its role as a control

mechanism2.4 Briefly describe mechanisms in the organization to maintain

control of costs

Prelims-I046430.qxd 4/21/07 6:25 PM Page vii

Prelims-I046430.qxd 4/21/07 6:25 PM Page viii

Workbookintroduction

1 ILM Super Series study links

This workbook addresses the issues of Costs and Budgets. Should you wish toextend your study to other Super Series workbooks covering related or dif-ferent subject areas, you will find a comprehensive list at the back of this book.

2 Links to ILM qualifications

This workbook relates to the learning outcomes of Unit M3.27 Working withcosts and budgets from the ILM Level 3 Award, Certificate and Diploma inFirst Line Management.

3 Links to S/NVQs in Management

This workbook relates to the following Units of the Management Standardswhich are used in S/NVQs in Management, as well as a range of other S/NVQs:

D6. Allocate and monitor the progress and quality of work in your area ofresponsibility

ix

Prelims-I046430.qxd 4/21/07 6:25 PM Page ix

4 Workbook objectives

In our daily lives we all need to control expenditure (another name for costs),so that we have money to spend and save. Companies also need to controlcosts to help them make a profit and reinvest for the future. Business organ-izations must be competitive to survive, so keeping costs under control is anessential activity. Other organizations need to control costs to make the bestuse of resources.

We need to distinguish between cost control and cost reduction. Cost reduc-tion is usually undertaken as a systematic programme to reduce existing levelsof costs, perhaps because a company is facing difficulties, or needs to be ableto match the prices of competitors. It may involve changing working methods,new sources of supply, or employing fewer people.

Cost control is a continuous and routine management function. It is almostcertainly part of your job, for costs aren’t just the concern of accountants andsenior managers. What’s more, you and your work team contribute to thefinal cost of whatever goods or services you provide, so it is important thatyou take an active interest in cost control.

In this workbook we will look at ways of controlling and monitoring costs.You will improve your understanding of these matters so that you and yourwork team can be more effective. And because most events and activities costmoney, you will know that it’s usually necessary to make financial plans toachieve your aims.

The same principles are relevant at work. Your organization has aims andobjectives with financial implications and these are identified by using budgets.

By preparing budgets which allocate money to specific purposes, an organiza-tion seeks to gain more control over its activities. Careful monitoring thenhelps to ensure that spending is kept within bounds. Budgets are considered anessential tool by organizations in the management of their affairs.

Throughout the workbook we look at examples from different organizations.Some may or may not be directly relevant to you at the moment, but the prin-ciples may be appropriate to something you do at work. Costing techniqueswere developed for practical purposes. You should use them when relevantand not when they would be too costly to use or of little benefit. Of course,this means that you must be aware of what is available to you.Remember thatthere is value in a breadth of knowledge, even where something does notimmediately appear relevant to you.

Workbook introduction

x

Prelims-I046430.qxd 4/21/07 6:25 PM Page x

4.1 ObjectivesWhen you have completed this workbook you will be better able to:

■ identify different costs and how they behave;■ appreciate how important it is to control costs;■ understand how standard costing techniques help to control costs;■ use different methods for controlling and reducing costs;■ understand what a budget is and how they are used;■ help to draw up workable budgets;■ use some budgetary control techniques.

5 Activity planner

The following Activities need some planning and you may want to look atthem now.

Activity 10 Here you are being asked to think about obtaining ‘value formoney’ from your work team and you may like to think aboutthis as you study your workbook before reaching that activity.

Activity 13 Here you are being asked to think about breakdowns in produc-tion or delivery of service and ways in which you could counter-act these problems.

Activity 34 You are invited to consider how to communicate the need forcost consciousness to your work team.

Activity 41 You are asked to consider any occasions where you have had tocontrol resources.

Activity 48 You are asked to consider which aspects of your budget are inand outside your control.

Activity 51 You are asked about reporting budget variances.

Some or all of these Activities may provide the basis of evidence for yourS/NVQ portfolio.All Portfolio Activities and the Work-based assignment (onpage 111) are sign-posted with this icon:

This icon will always show the unit to which the activity or Work-basedassignment relates.

Note that the Work-based assignment suggests that you speak to your man-ager, finance director or to your colleagues in the accounts office about theway in which costs are controlled in your organization.

You might like to start thinking now about who to approach and arrange tospeak with them.

xi

Workbook introduction

Prelims-I046430.qxd 4/21/07 6:25 PM Page xi

Prelims-I046430.qxd 4/21/07 6:25 PM Page xii