Cost and Revenue: Recording, Analysis, and Attribution of Costs in Business Entities

This report discusses the purpose of internal reporting, relationship between various costing systems, identification of responsibility, cost, profit and investment centres, characteristics of different types of cost classifications, difference between marginal and absorption costing, and more. It also covers the recording and analysis of cost information for material, labour, and expenses, various stages of inventory, valuation of inventory using different methods, and the behaviour of different types of costs. Additionally, it discusses the attribution of overhead cost to production and service cost centres, calculation of overhead absorption rates, adjustments for under or over recovered costs, and more.

Cost and Revenue
Table of Contents

INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
1.1 Purpose of internal reporting and providing accurate information to management..............1
1.2 Relationship between various costing systems.....................................................................1
1.3 Identification of responsibility, cost, profit and investment centres.....................................2
1.4 Characteristics of different types of cost classifications and their use..................................2
1.5 Difference between marginal and absorption costing...........................................................2
TASK 2............................................................................................................................................3
2.1 Record of cost information for material, labour and expenses.............................................3
2.2 Analysis of cost information for material, labour and expenses...........................................3
2.3 Various stages of inventory...................................................................................................3
2.4 Valuation of inventory using different methods...................................................................4
2.5 Description of behaviour of different types of costs.............................................................5
2.6 Record of cost information using different costing systems.................................................6
TASK 3............................................................................................................................................6
3.1 Attribution of overhead cost to production and service cost centres using agreed bases.....6
3.2 Calculation of overhead absorption rates according to suitable bases of absorption............7
3.3 Adjustments for under or over recovered costs.....................................................................7
3.4 Methods of allocation, apportionment and absorption at regular intervals...........................8
3.5 Communication with staff to resolve queries related to overhead cost data.........................9
TASK 4............................................................................................................................................9
4.1 Comparison of budgeted and actual costs noting any variances...........................................9
4.2 Analysis of variances for management reports...................................................................10
4.3 Information for budget holders of any significant variances..............................................10
4.4 Formulation of management reports in an appropriate format...........................................10
TASK 5..........................................................................................................................................11
5.1 Estimation of future income and costs for decision making using difference elements.....11
5.2 Effect of changing activity levels on unit costs..................................................................12
5.3 Calculation of the effect of changing activity levels on unit costs.....................................12
5.4 Identification of factors that are affecting short and long term decision making...............13
CONCLUSION..............................................................................................................................13

REFERENCES..............................................................................................................................14

INTRODUCTION
Cost and revenues are two separate elements of a business. Cost is the total amount which
is involved in the manufacturing process of a products and revenues are the incomes that are
generated by a business entity on the sales of those items. All the expenses that are related to
material, labour and other overheads are considered by the companies while deciding prices of
their manufactured products. This assignment is based on the concept of these two components.
In this report various topics are discussed such as nature and role of costing system, recording
and analysis of cost information, apportionment of costs according to organisational
requirements etc. Analysis of deviations from budgets, reporting of them to the management and
ability to use information which is gathered from costing system in decision making is also
covered in this report.
TASK 1
1.1 Purpose of internal reporting and providing accurate information to management
Purpose of internal reporting: Internal reporting is conducted in all the business entities
to analyse that organisation is performing well or not. If it is not good then strategic decisions
can be taken by the managers in order to improve it.
Purpose of providing accurate information to management: It is very important to
provide accurate, reliable and appropriate information to the management. Main purpose of this,
is to facilitate managers in making right decisions for business and its betterment.
1.2 Relationship between various costing systems
All the business entities use two major type of costing system these are job and process
costing systems. Both of them are interrelated with each other. In job costing material, labour
and overheads are recorded for every task which is performed by the company. In second method
all these elements are transcribed for entire production procedure (Yang and Chen, 2018).
When managers have any problem regarding production process as brief information is
recorded in it, then job costing can be used to get detailed information for each expense hence
both are related to each other.
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1.3 Identification of responsibility, cost, profit and investment centres
Responsibility centre: It is subunit of a company for which a manager has responsibility
and authority. These are the different functional departments within an organisation such as
finance, marketing, human resource, IT etc.
Cost centre: It is a cost department of a business entity in which all the staff members
and managers are responsible for costs related decisions not revenues. It includes production,
maintenance and quality control divisions.
Profit centre: It is a central part of an enterprise which is responsible to make higher
contribution in organisational profits. It includes selling department of the company.
Investment centre: It is an internal department of an organisation which utilises capital
and funds appropriately in order to enhance overall profitability of the company. Sales and
manufacturing departments are considered as the part of this centre.
1.4 Characteristics of different types of cost classifications and their use
There are five types of cost classifications by nature, in relation to cost centre, by time,
for decision making and by nature of production process. Characteristics of all of them are as
follows:
 It helps to make best decisions for the organisation by segregating costs in various parts.
 All the classified costs helps to estimate expenses that may take place in future and then
managers can plan in advance to bear them.
Uses of classification of costs:
 Classified costs are used to determine each cost which has been occurred in
manufacturing process.
 These are also used to allot appropriate funds to different functional departments of the
company according to their requirements by analysing their costs.
1.5 Difference between marginal and absorption costing
Marginal costing Absorption costing
This method is used to separate fixed and
variable costs.
It is used to absorb all the expenses from the
sales of units.
In this costing technique costs are classified in
fixed and variable.
In this method overheads are classified in
production, administration, selling and
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distribution expenses (Difference between
marginal and absorption costing, 2019).
TASK 2
2.1 Record of cost information for material, labour and expenses
Costing procedure is the activity of recording costs in appropriate accounts so that actual
expenses can be determined that have taken place in manufacturing process. There are various
types of costs that are faced by an organisation. These are material, labour and overheads (Wang
and et.al., 2015).
There are three different types of materials that are raw, work in progress and finished
goods. It includes direct and indirect and timbers for constructing house is an example of such
expenses. Labours are the workers who are working in an organisation to manufacture products.
These are the total of wages that are paid to the workforce.
There are two main types of overheads that are operating that are related to revenue
generation process and non operating that are concerned with business execution process. Power,
heat, postage, legal charges are example of them.
2.2 Analysis of cost information for material, labour and expenses
Material costs are recorded on the basis of total requirement of production or the desired
units that are going to be manufactured by the company. It is a variable expense that changes
with total production units. Labour cost is recorded on the basis of total workers who are
involved in manufacturing process. It depends upon total items that are made by the company if
it decreases or increases then wages paid to work force will also vary (Sufian and Kamarudin,
2015).
There are various types of expenses that are faced by all the business entities while
producing products. Some of them are fixed and other are variable. These are rent, depreciation,
insurance premium etc.
2.3 Various stages of inventory
There are three different stages of inventory, all of them are as follows:
Raw material: It is the first stage of inventory which is used to make a product. It is also
known as unprocessed material and feed stock.
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Work in progress: It refers to the process in which goods are partially manufactured. It
is also known as in process inventory. The items that are waiting for completion are considered
as work in progress stock.
Finished goods: It is the last stage of inventory in which goods complete the
manufacturing process and not yet been presented in the market for sales (Shoup, 2017).
2.4 Valuation of inventory using different methods
First in first out (FIFO):
Last in first out (LIFO):
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Weighted average:
2.5 Description of behaviour of different types of costs
There are four different types of costs that can be faced by a manufacturing company in
production process. All of them are as follows:
Fixed: It includes such expenses that does not vary with units produced by the
organisation. Rent, interest and insurance premium are some examples of fixed costs (Shepherd,
2015).
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Variable: The costs that changes due to increment or decrement of production units. In
other words it can be defined as the marginal expenses over all the items that are manufactured
by the organisation. It includes direct material, fright outward etc.
Semi variable: The expenses that are partially fixed and partly variable. As it is a
mixture of fixed and uncertain costs hence it is also named as mixed cost. Depreciation is the
main example of this cost.
Stepped: It is a fixed cost with some certain boundaries when the limit is crossed then it
will get changed. It is an additional investment which is required to increase the production
(Stepped cost, 2019).
2.6 Record of cost information using different costing systems
Job: In job costing method costs of every task which is performed by the organisation is
recorded. Managers may get detailed information of expenses that have taken place for that are
faced by the company.
Batch: This method is used to take homogeneous products as cost unit for organisation.
In this costing technique a batch includes a particular number of items or articles.
Unit: In this system cost that has taken place for manufacturing a specific unit of product
is recorded. All fixed and variable expenses related to one item is considered in this method.
Process: Costs related to production process is recorded in this method. It is mainly used
in those companies which manufactures products in large quantities.
Service: In this costing technique expenses related to each service rendered by a
company is recorded. It is mainly used in hospitality industry.
TASK 3
3.1 Attribution of overhead cost to production and service cost centres using agreed bases
There are two main types of attribution of overhead costs. Both of them are described
below:
Direct: It is the most popular method of cost attribution. Main purpose of this technique
top allot costs to all production departments that are related to service division (Cost allocation
methods, 2019).
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Step Down: In this method only some specific costs are considered such as those
expenses that are incurred by human resource and maintenance department of the organisation. It
is responsible to provide rank to service divisions according to their performance.
3.2 Calculation of overhead absorption rates according to suitable bases of absorption
3.3 Adjustments for under or over recovered costs
When in an organisation if cost is over or under recovered then different types of
adjustments are made. All of them are as follows:
 In seasonal business entities balance amount is carried forward in subsequent year with
such expectation that it will be adjusted in that period.
 Organisations can use a supplementary rate in order to adjust the amount which is over or
under recovered.
 The amount of under or over recovered cost can be transferred to costing P & L account
so that it can be adjusted from net profits (Kong, Bayram and Devetsikiotis, 2015).
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3.4 Methods of allocation, apportionment and absorption at regular intervals
There are various methods of cost allocation, apportionment and absorption all of them
are as follows:
Direct labour: Labour costs are allotted on the basis of this method. All such type of
expenses are variable because it changes with production.
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Machine time: It is another method of cost allocation and absorption in which expenses
are absorbed and allotted on the basis of total machine hours. When equipments are not used at
that time it becomes zero.
Square footage: Rent and other expenses are allotted on the basis of this method. These
are fixed and does not vary with manufactured units. Whether the organisation is producing
items or not it is required to be faced (Sahoo, Mehdiloozad and Tone, 2014).
3.5 Communication with staff to resolve queries related to overhead cost data
For every manager it is very important to resolve all the queries that are related to
overhead cost data so that it can be analysed that all of them are relevant to production or not.
The information can be gathered by conducting a formal meeting or evaluating reports that are
generated by the workers (Kimball, 2014).
TASK 4
4.1 Comparison of budgeted and actual costs noting any variances
Budgeted Actual
Units Quantity Price Total
budgeted
cost
Quantity Price Total
actual cost
A 200 60 12000 180 60 10800
B 150 65 9750 160 62 9920
Input 350 21750 340 20720
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Loss - -
Output 350 350
Material cost variance= Total budgeted cost- total actual cost
=21750-20720
=1030(F)
From the above data which is based on estimation, it has been analysed that there is a
slight difference between budgeted and actual cost. The variation take place due to weak
estimation power of managers. Standard cost is based on prior year's information but actual one
take place when money is actually spent on the production and other services.
4.2 Analysis of variances for management reports
There are various types of variances that can be calculated by the managers to record
them in management reports so that it can be presented in front of top authority. Following
variances are analysed from above data that can be used in reports:
Material cost variance= Total budgeted cost- total actual cost
=21750-20720
=1030(F)
Material price variance= SP-AP*(AQ)
For A: 60-60*180= 0
For B: 65-62*160= 480(F)
MPV= 480(F)
Material usage variance= SQ-AQ*(SP)
For A: 200-180*60= 1200(F)
For B: 150-160*65= 650(A)
MPV= 550(F)
All the above calculated variances are analysed for management reports in order to
determine that organisation have met its estimations or not.
4.3 Information for budget holders of any significant variances
There are three main types of variances these are material cost, price and usage variances.
All of them are very important for budget holders because it may guide them to analyse that their
estimations have met the actual results. If there is any variances then they can make changes in
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their strategies so that appropriate forecasting can be made for future period. It will be very
beneficial for them as it can help them to allot right funds to functional departments of the
company (Kamarudin and et.al., 2014).
4.4 Formulation of management reports in an appropriate format
Management report
The organisation is a manufacturing company and different types of variances are calculated.
These are MCV, MPV, MUV and their values are 1030, 480 and 550 respectively. All of them
are favourable which depicts that estimations are made near to the actual results. It is very
beneficial for the companies as it results in increased income.
A time scale for acquiring elements of variances is as follows:
Activity Time
Budgeted
Material 6 Days
Labour 10 Days
Actual
Material 5 Days
Labour 10 Days
From the above time scale it can be assessed that organisation has estimated that material
will be arranged in 6 days but in actually it is placed in 5 days. Labour is acquired in the
budgeted time.
TASK 5
5.1 Estimation of future income and costs for decision making using difference elements
Relevant costs: It is very beneficial for the company to estimate future income and costs
because managers may determine all of them by analysing current year's figures.
Break even analysis: It is a method which is used to estimate the level where all the
costs can be recovered and organisation can reach to a stage where no profits are acquired and no
losses are faced.
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Margin of safety: This method is used to measure soundness of organisation to exceed
BEP sales. It can help to estimate that company is able to achieve higher profits in future or not
with the help of gathered information.
Target profit: It is an expected amount of profits that are set by the managers as an
target and they have planned to acquire reach the goal. It helps to predict possible future incomes
as the target is made on the basis of estimation.
Profit volume analysis: In this analysis a specific percentage is analysed which is profit
volume. It is based on sales and contribution of the company that can be used in future to
estimate profits on units sold by the company (Govindan and Popiuc, 2014).
Limiting factors: Shortage of labour, machine hours and materials etc. are limiting
factors for a company. These can be used to estimate future costs if organisation is having
information of these components.
Payback: It is a method which is used by organisations to analyse the period in which all
the invested amount is going to be recovered. If managers are having such information then they
can estimate possible future incomes with the help of it.
Discounted cash flow: This method helps to forecast future incomes as it is an
estimation method which is used to predict possible returns on a particular investment (Banker
and Byzalov, 2014).
5.2 Effect of changing activity levels on unit costs
If an organisation make changes in level of activity then it will make various effects on
unit cost. When it get exaggerated than total costs will also be enhanced which will result in
increased production due to inflation in variable expenditures. Fixed expenses does not vary with
such changes. In opposite condition when it get decreased then total costs will get declined and
total manufactures units will be reduced. It will affect cost of each unit because in high
production, cost will be low in lower production costs will be higher.
5.3 Calculation of the effect of changing activity levels on unit costs
An example which is based on estimation is being used to calculate the effect of changing
activity level on unit costs. Calculations are as follows:
The Rising Rain Company's average cost for each unit is 1.425 for lower activity level
which is 16000 units. For higher activity level of 20000 units the per unit cost is 1.38. Assuming
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that all of the activity levels mentioned in the question are in relevant range (Balakrishnan, Labro
and Soderstrom, 2014).
Particular Cost Units
Higher level of
activity(20000*1.38)
27600 20000
Lower level of
activity(16000*1.425)
22800 16000
Changes 4800 4000
From the above table it can be observed that changes in activities and units were 4800
pound and 4000 units. It will affect the cost of each unit which will decreased up to 1.20
(4800/4000).
5.4 Identification of factors that are affecting short and long term decision making
There are various types of factors that may affect long and short term decision making
process of business entities. All of them are past experiences, an escalation of commitment and
sunk outcomes, demand of customers, supply conditions, production, competitors in the market,
buyer's bargaining power and their requirements. All long and short run decisions get affected
due to these factors as all of them are based on them (Altug and van Ryzin, 2014).
CONCLUSION
From the above project report it has been concluded that costs and revenues are two
different components that are used in costing system. Cost is total of all expenses that are faced
by the business entities in manufacturing process and revenues are the receipts that are acquired
from sales of products. There are two major types of costing techniques that are absorption and
marginal. Both of them can be used by the organisations to separate different expenses such as
fixed, variable etc.
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REFERENCES
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of management accounting research. 26(2). pp.91-116.
Banker, R. D. and Byzalov, D., 2014. Asymmetric cost behavior. Journal of Management
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Govindan, K. and Popiuc, M. N., 2014. Reverse supply chain coordination by revenue sharing
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Kamarudin, F. and et.al., 2014. Cost, revenue and profit efficiency of Islamic and conventional
banking sector: Empirical evidence from Gulf Cooperative Council countries. Global
Business Review. 15(1). pp.1-24.
Kimball, B. A., 2014. The Rising Cost of Higher Education: Charles Eliot's “Free Money”
Strategy and the Beginning of Howard Bowen's “Revenue Theory of Cost,” 1869—
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Kong, C., Bayram, I. S. and Devetsikiotis, M., 2015. Revenue optimization frameworks for
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Shepherd, R. W., 2015. Theory of cost and production functions (Vol. 2951). Princeton
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Shoup, D., 2017. The High Cost of Free Parking: Updated Edition. Routledge.
Sufian, F. and Kamarudin, F., 2015. Determinants of revenue efficiency of Islamic banks:
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Online
Difference between marginal and absorption costing. 2019. [Online]. Available through:
<https://keydifferences.com/difference-between-marginal-costing-and-absorption-
costing.html>
Stepped cost. 2019. [Online]. Available through:
<https://simplicable.com/new/step-costs>
Cost allocation methods. 2019. [Online]. Available through:
<https://blog.udemy.com/cost-allocation-methods/>
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