Costs and Revenues Assignment

This assignment explores the concepts of costs and revenues, covering topics such as costing systems, inventory valuation, overhead allocation, variance analysis, and decision-making factors. It provides practical examples and calculations to illustrate key concepts and enhance understanding.

COSTS AND REVENUES

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
TASK 1 ...........................................................................................................................................1
1.1 Explaining purpose of internal reporting and providing accurate information to
management................................................................................................................................1
1.2 Relationship between various costing systems within an organisation...............................1
1.3 Identifying cost centres, responsibility centres, profit and investment centres in an
organisation.................................................................................................................................2
1.4 Characteristics of different kinds of cost classification and their use in costing.................3
1.5 Difference between marginal and absorption costing ..........................................................3
TASK 2 ...........................................................................................................................................4
2.1 Recording cost information for labour, material and expenses ............................................4
2.2 Analysing cost information for labour, material and expenses according to organisation's
procedure.....................................................................................................................................4
2.3 Defining different stages of inventory .................................................................................5
2.4 Inventory valuation using different methods .......................................................................5
Closing inventory: 50 unit @ (£)15 = (£)750.............................................................................7
2.5 Describing behaviour of different cost..................................................................................8
2.6 Recording cost information by using different costing systems ..........................................9
TASK 3 ...........................................................................................................................................9
3.1 Attributing overhead costs ...................................................................................................9
3.2 Calculating overhead absorption rate .................................................................................10
3.3 Adjustments for over or under overheads...........................................................................11
3.4 Methods of allocation, absorption and apportionment .......................................................12
3.5 Communicating cost related data .......................................................................................12
TASK 4 .........................................................................................................................................12
4.1 Comparing budget cost with actual cost with variances.....................................................12
4.2 Analysing variance for management report........................................................................12
4.3 Providing information to budget holders and making suggestions...................................13
4.4 Preparing management report ............................................................................................13

TASK 5 .........................................................................................................................................15
5.1 Preparing estimates of future income and cost of decision making ...................................15
5.2 Explaining effect of changing activity level on unit costs..................................................17
5.3 Calculating effect of changing activity level on unit costs ...............................................17
5.4 Identifying factors that affect short and long term decision making .................................18
CONCLUSION..............................................................................................................................18
REFERENCES..............................................................................................................................19

INTRODUCTION
Cost and revenue are the two aspects of an organisation around which all the activities
revolves (Abel and Le Roux, 2016). The present report is going to discuss purpose of internal
reporting, classification of cost and their behaviours, different costing system and how material,
labour and expenses are recorded in these systems. A segment will discuss the importance of
management reports and factors affecting decision making of managers in an organisation.
TASK 1
1.1 Explaining purpose of internal reporting and providing accurate information to management
Internal reporting to management is a well defined system of providing business
information of all levels to management. This enables managers to measure effectiveness of
different responsibility centres.
The main purpose of internal reporting is:
 To facilitate the managers in their decision making process.
 Communicating vital information about the company's performance to interested
stakeholders.
 Providing accurate and reliable information in the form of reports helps the management
in analysing different trends.
 For examining financial health of the company such as analysis of utilisation of different
resources, cash flow etc.
 To improve the efficiency and effectiveness of senior management of company.
 To control the business operations. Cost control and cost reduction is efficiently done by
analysing the reports of each level in an organisation.
1.2 Relationship between various costing systems within an organisation
There are various types of costing systems such as marginal, absorption, standard,
historical which a company adopts for allocating the cost to different expenditure overheads.
Marginal and absorption costing systems shares a prevalence that both the systems helps in
finding out the cost per unit and profit per unit. Both the system helps management in their
decision making regarding estimation of budgets, assessing where the resources are being over
1

utilised etc. The management gains from these systems as these methods helps in optimum
allocation of cost to different overheads. This leads to accurate determination cost of each input
that is being used in production process (Dempsey and Kelliher, 2018).
However, there is one major difference between these two system is that marginal costing
only considers variable costs as product cost and fixed cost as cost of period whereas absorption
costing considers both fixed and variable cost as product cost.
Standard and historical costing system also shares some similar characteristics such as
determining cost of each unit. These also helps management in framing out various rationale
decisions regarding the cost allocation within the different overheads. However, standard costing
considers pre-estimated standards for determining the cost of direct materials, labour, direct
overheads whereas historical costing method considers actual costs that have been incurred and
does not rely estimated standards.
1.3 Identifying cost centres, responsibility centres, profit and investment centres in an
organisation
A responsibility centre can be defined as a part of an enterprise for which a specific
individual namely as manager who is responsible for all the operations of that unit. Cost and
profit centres are some typical example of responsibility centre.
Cost centre is one of the type of the type of responsibility centre which is concerned with
a particular department in a company to which different costs are allocated. Logistics, It,
production, R&D are some departments in an organisation which incurs costs that directly or
indirectly contribute in manufacturing of the goods and services.
Profit centre is a segment of an organisation whose stand-alone profitability is analysed.
Profits and losses of this segment is computed separately. The manger responsible for profit
centre is responsible for bringing cash in to the organisation by the way of increase in sale.
Selling or sales department is profit centre which is responsible for generating higher sales and
for which profit and loss can be calculated (Hemel, Nou, and Weisbach, 2018).
Investment centre is treated as business unit in an organisation for evaluating
performance of a segment or department of company. This takes into consideration costs,
2

revenues, capital expenditure in the form of assets that are used in production process, ultimately
contributing to profitability of the organisation.
1.4 Characteristics of different kinds of cost classification and their use in costing
There are different types of costs that a company incurs for producing and selling its
goods and services which are given below:
Fixed cost : These are the cost that does not vary with change in production level such as
rent of premises, insurance premium, interest payment, depreciation etc. Fixed cost are used in
costing for determining the total costs incurred for producing each unit.
Variable cost : These are the costs that varies with change in production level such as
direct labour, raw materials, factory's electricity bill etc. Marginal costing considers only variable
cost in determining the cost of each additional unit of output.
Semi variable cost: These cost are mixture of fixed and variable cost. To an extent, a part
of cost remains fixed but after passing the limit, it becomes variable in nature.
Direct an Indirect cost : Direct costs are those which directly contribute to the production
cost such as direct labour, material utility. These are summed for up for finding out prime cost of
a product.
Indirect cost are those which do not directly contributes to manufacturing of a product
such as salaries, commissions, packaging etc. These are included in prime cost for finding out
total cost of production (Holzhacker, Krishnan and Mahlendorf, 2015).
1.5 Difference between marginal and absorption costing
Basis Marginal costing Absorption costing
Treatment of fixed cost and
variable cost
It considers only variable cost
as products cost
It considers fixed and variable
both costs as product cost.
Inventory It does not take into
consideration opening and
closing stock while
determining cost.
It involves opening and closing
inventory in its calculation.
Purpose and requirement There is no such legal It is legally required to apply
3

foundation and it is generally
prepared for internal reporting
for enabling managers to make
rationale decisions.
absorption costing and its
reporting purpose is to
communicate information
externally.
TASK 2
2.1 Recording cost information for labour, material and expenses
An example of recording cost information is stated below:
COST SHEET
Particulars
Total cost
(£)
Cost per unit(10000 units)
(£)
opening stock of raw materials 15000 1.5
Add: raw material purchased 100000 10
: other purchasing expenses 20000 2
: Raw materials used 50000 5
: Direct wages 20000 2
: factory's electricity bill 15000 1.5
:repairs and maintenance 20000 2
Less: closing stock of raw materials 10000 1
Prime cost 230000 23
Add: opening WIP 20000 2
Add: office expenses 10000 1
add: postage & telegraph 12000 1.2
Less: closing stock of WIP 10000 1
Cost of production 262000 26.2
Add: Opening stock of finished goods 18000 1.8
less: closing stock of finished goods 15000 1.5
Cost of goods sold (COGS) 265000 26.5
Add: advertising expenses 40000 4
Cost of sales 305000 30.5
Add: profit margin of 20% 61000 6.1
4

Selling price 366000 36.6
2.2 Analysing cost information for labour, material and expenses according to organisation's
procedure
Direct labour, raw material's opening stock, purchases of raw materials, expenses related
to purchasing of raw materials such as carriage expenses are added. Direct wages, manufacturing
expenses such as factory's electricity bill, repairs and maintenance are added up for finding out
the prime cost of the product. Closing stock of raw material is deducted while calculating prime
cost (Kim, 2018).
Prime cost is the cost of manufacturing a product for sale by taking into consideration
direct cost to production such as direct materials, direct wages and direct manufacturing
expenses. This cost is the basis for calculating cost of production in which opening WIP is added
along with administrative expenses such as office expenses, postage, telegraph etc. Closing stock
of WIP is deducted for finding out the Cost of goods sold (COGS). In here, opening and closing
stock of finished goods are added and subtracted respectively for calculating cost of sales.
Selling expenses such as advertising are added up for reaching at total cost. A desired profit
margin is added up in total cost for determining the selling price of the product produced. This is
the price at which an organisation sells it products to the consumers.
2.3 Defining different stages of inventory
Inventory in an organisation refers to all work that has been done or it is in process for
converting raw materials into finished goods. The inventory have 4 stages that are given below:
 Raw material : These include every component that is used in conversion process of
manufacturing goods and services. Example of raw material are crude oil for producing
chemicals, fuels etc. vegetables used by restaurant company for converting into a dish
(Becker-Peth and Thonemann, 2016).
 Work in progress: It includes partially processed raw materials, component, assembling
products etc. that is being transferred from stage one.
 Finished goods : These are the goods that are fully processed and are ready to be used by
final consumers. Inventory of finished goods include stock of ready to use goods.
5

 Goods for resale : Sometimes products are returned by customers that can be sell again
are included in inventories of organisation However, this element is usually not included
in inventory of a company.
2.4 Inventory valuation using different methods
FIFO method : The method considers materials that are purchased or produced first are
sold first. The calculation is given below:
Purchased or produced units : 68+140+40+78 = 326 units
Goods sold during the period : 94+116+62= 272 units
Closing inventory at the end of year : 326 - 272 = 54 units
cost price of goods sold per unit cost number of units Total
opening inventory 15 68 1020
Purchased on 5 march 15.50 140 2170
Purchased on 11 march 16 40 640
Purchased on 16 march 16.50 78 396
272 (£)4226
Closing inventory: 54 units at the price of (£)16.50 = (£)891
Date sales Purchases Balance
No. of
units
Cost per
unit (£)
amount
(£)
No. of
units
Cost per
unit (£)
amount
(£) No. of units
Cost
per unit
(£)
amount
(£)
1st
March 68 15 1020
5th 140 15.50 2170 140 15.50 2170
9th 68 15 1020
26 15.50 403 114 15.50 1767
6

11th 40 16 640 40 16 640
16th 78 16.50 1287 78 16.50 1287
20th 114 15.50 1767
2 16 32 38 16 608
78 16.50 1287
29th 38 16 608
24 16.50 396
54 16.50 891
LIFO method: This method considers that new inventory is sold first as compared to
those which were purchased or manufactured earlier.
Units purchased : 60+140+70= 270 units
Number of units sold: 190+30= 220 units
Closing inventory: 270-220 = 50 units
cost price of goods sold per unit cost
(£)
number of units Total
(£)
Sales from new inventory
27th march
16 70 1120
Sales from inventory 5th
march
15.50 140 2170
Sales from inventory 1st
march
15 10 150
220 (£)3440
Closing inventory: 50 unit @ (£)15 = (£)750
Date sales Purchases Balance
No. of
units
Cost per
unit (£)
amount
(£)
No. of
units
Cost
per unit
amount
(£)
No. of
units
Cost per
unit (£)
amount
(£)
7

(£)
1st march 60 15 900
5th 140 15.50 2170 60 15 900
140 15.50 2170
14th 140 15.50 2170
50 15 750 10 15 150
27th 70 16 1190 70 16 1190
29th 30 16 480 10 15 150
40 16 640
31st
march 10 15 150
40 16 640
Weighted average method: The weighted average price is calculated by total cots of
inventory divided by total number of units in inventory.
Weighted average cost price
of goods sold
per unit cost
(£)
number of
units
Total
(£)
opening inventory 15 60 900
purchases on 5 march 15.50 140 2170
purchases on 27 march 16 70 1120
Total 270 4190
Average cost (4190/270) 15.52
Date sales Purchases Balance
No. of
units
Cost per
unit (£)
amount
(£)
No. of
units
Cost
per
unit(£)
amount
(£)
No. of
units
Cost per
unit (£)
amount
(£)
8

1st march 60 15 900
5th 140 15.50 2170 140 15.50 2170
200 15.35 3070
14th 190 15.35 2916 10 15.35 154
27th 70 16 1120 70 16 1120
80 15.92 1274
29th 30 15.92 478 50 15.92 796
31st
march 50 15.92 796
2.5 Describing behaviour of different cost
Fixed cost : These costs remains same regardless of production level or number of units
sold bin market. Fixed cost shows inverse relationship with production activity. When large
number of units are produced, fixed cost tends to decrease and vice versa. Fixed cost nature of
being constant reflects that per unit fixed cost varies for above mentioned reason (Borenstein,
2016).
Variable cost : These costs are directly varies with variation in production level. These
are directly proportional to output rate. However, only variable cost changes with change in
production level, variable cost per unit remains constant here. Change is occurring
proportionately which means increase or decrease in level remains constant.
Semi variable cost: These costs posses the characteristics of fixed and variable cost. To
a certain level, they remain constant but after surpassing that level, it starts becoming variable in
nature. These cost shows movement in their slopes as any abrupt changes in the demand of
goods leads to higher variation costs and slope increases at a faster rate.
2.6 Recording cost information by using different costing systems
Job costing: A hypothetical example of job costing is given below:
JOB NO.44 No. Of units cost per unit (£) Amount (£)
Materials Direct stores 25 40 1000
special spare parts 15 50 750
Labour Direct wages 20 10 200
Wages of supervisors 5 25 125
9

Total overheads 40 10 400
TOTAL COST 2475
Batch costing : It is a particular form of specific job costing.
Cost sheet for BATCH No. D-500
Particulars Amount (£)
Materials 15000
wages A division (700 hours* 5) 3500
B division (1050 hours*8) 8400
Manufacturing overheads A division(700 hours*3) 2100
B division (1050 hours*4) 4200
Factory cost 18200
Unit based costing : This method ascertains cost per unit of a product. This type of
costing identifies and reflects relationship between costs, overheads activities and produced
goods.
Process costing : This method assigns manufacturing costs to different process activity
of the manufacturing unit. The cost of process is transferred to next process till it reaches the
process where items are in form of finished products.
Service costing : It is one of kind of operation costing used by organisations providing
services. It determines cost of providing services for sale to customers and where no goods are
produced.
TASK 3
3.1 Attributing overhead costs
Direct method: This method allocate overheads of particular service department to every
other department in company. For example: (£)
Particulars Service Dept. Operating Dept.
Administration IT A B
10

Costs 10000 5000 30000 20000
Number of
employees 200 50 150 150
Machine hours 30 20 10 15
Allocation of
administration (10000)
5000
(10000/300*150
5000
(10000/300*150)
Allocation of IT (5000)
2000
(5000/25*10)
3000
(5000/25*15)
Step down method: Under this method, allocation of cost is done on sequential basis.
For example:
(£)
Particulars Service Dept. Operating Dept. TOTAL
Dept. A Dept. B Dept. X Dept. Y
Cost before
allocation 150000 50000
100000 300000 600000
no. of hours 600 200 300 900
space occupied 2500 500 1000 500
Allocation: (150000) 21428.5 32142.8 96428
(71428.5)
(50000+21428.5)
47169
(71428.5*1000/
1500
23809.5
(71428.5*500/
1500)
Total cost for
allocation 0 0 179311.8 420327.5
3.2 Calculating overhead absorption rate
Machine hour method : This method used is where machines are important cost centre
in production of goods. The absorption rate is determined by following formula :
11

absorption rate : Estimated Factory Overheads * 100
Budged machine hours
: $150000/25000 hours*100
=$6 per hour.
Absorbed overheads : Actual machine hours * absorption rate
: 44 hours* $6 = $264.
Labour hour rate: This method is used where labour is important cost centre in
production of goods. It calculated by following formula:
absorption rate : Estimated Factory Overheads * 100
Budged labour hours
: $150000/30000 hours*100
=$5 per hour.
Absorbed overheads : Actual labour hours * absorption rate
: 63 hours* $5 = $315.
3.3 Adjustments for over or under overheads
Number of machine hours: 56448
Normal loss (28*5*48) : (6720)
Efficient working hours: 49728
Machine hour rate : 12430/49728 = 2.5
Overhead absorbed: 4200 hours*2.5 = 10500
Overheads incurred: 10200
Under absorption of overheads: 10500-10200= 300
Wages (28*42*4) @1.50: 7056
Wages incurred: 7400
Under absorption of wages: 7056-7400 = 344
12

3.4 Methods of allocation, absorption and apportionment
Methods of allocation are direct and step down. Absorption rates can be found out
through various methods such as labour hour, machine hours, prime cost, direct wages etc. Cost
can be apportioned by using physical unit, survey, contribution method, standard cost method or
market value method.
These methods help a manufacturing unit in allocating its various overheads to different
operating units by using appropriate methods. Costs are effectively determined by applying
machine hours methods where machines are vital cost centre in production unit. Apportionment
of cost is done for identifying the separate cost of products are jointly produced by using
methods which is most suitable for a company (Liang and eta.al., 2017).
3.5 Communicating cost related data
Cost related information is communicated with different stakeholders within organisation
such as various departments, units etc. This is done for comparing the actual data with the
budged data by the departmental heads so that necessary action can be taken for finding cost
inefficiency in their operations.
TASK 4
4.1 Comparing budget cost with actual cost with variances
(£)
Particulars Budgeted cost actual cost Variance
Materials 2000 1800 200
Direct wages 1000 1200 -200
water & power
supplies
1500 1600 -100
repairs and
maintenance
2500 2000 500
Total cost 7000 6600 400
13

4.2 Analysing variance for management report
Variances refers to difference between estimated cost and actual cost. There were
differences in overheads, wages and raw materials of organisation. Materials cost was less
because of decrease in the prices of raw materials, wages increased dues to increase in minimum
wage rate in country (Yang, Lan and Huang, 2018). Water& power supplies increase due to
slight increase in production activity. Lastly, repairs and maintenance saw a variance of 500
which might be due to good conditions of machines maintained by company.
4.3 Providing information to budget holders and making suggestions
Different budget holders of different department submit budgets to cost accountant who
complies each budget for preparing a master budget. The information about the variances is
transferred to interested people for evaluating themselves that whey they went wrong and where
they achieved their target of meeting their forecasted figures with actual ones.
Power & water supplies costs can be neutralise by undertaking proportionate large
production for reaping benefits this increased variable cost. Large stock of raw material could be
purchased as the prices are less. This will help in making low cost product and generating high
profits (Mahendru and Bhatia, 2017).
4.4 Preparing management report
Management report is the summarised data of company for a particular period on MIS for
enabling managers for taking accurate decisions and judgements regarding company's cost of
producing goods.
14

15

TASK 5
5.1 Preparing estimates of future income and cost of decision making
Relevant costs: This cost focuses on eliminating the unwanted costs that are inured for
making decisions. Its objective is to avoid that cost costs that do not affect the future cash flow.
Examples are opportunity cost, incremental cost.
Break-even analysis : This analysis helps in identifying the point at which expenses
meets income, where an organisation makes no profit no loss.
Illustration 1: BREAK EVEN ANALYSIS
(Source : The Power of Break-Even Analysis, 2013)
Margin of safety: Margin of safety is basically difference between Break-even sales and
actual sales. Its purpose is to help managers in identifying the amount of deviation in revenue
that will occur in event of break even situation.
Target profit : It is the objective or goal of organisation regarding what must be their
desired profit margin.
16

Profit volume analysis: This analysis measures the responsiveness of change in
profitability due to change in sales level (Cost-Volume-Profit Analysis. 2016). It is calculated by
following formula:
PV ratio : Contribution/ sales*100
Limiting factors: These factors becomes the constraints in organisation's commercial
activities. These factors restrict the output level of company. Examples are labour hours,
machine hours, raw material availability.
Payback: It refers to time require for recovering the costs incurred on acquiring capita
asset for assisting in operating activities.
Discounted cash flow: It is a valuation method for determining the value of investment
by considering their future value of money. Example is given below:
17

5.2 Explaining effect of changing activity level on unit costs
When the production activity changes, cost per unit also changes. Fixed cost tends to
lower down when large productivity activity is undertaken. Variable cost tends to increase with
increase in production level and vice versa. The effect of change will remain constant. For
example : Fixed cost increment increases the overall cost of production such as increases rate of
interest payment (Manaf, Qadir and Abbas, 2016).
5.3 Calculating effect of changing activity level on unit costs
A calculation of change in fixed cost for production of 5000 units is reflected in below
example:
18

Particular Amount Cost per unit
Fixed cost 10000 2
variable cost 5000 1
Total cost 15000 3
Increased fixed cost 20000 4
Variable cost 5000 1
Total cost 25000 5
change in unit cost
(5-3)
2
5.4 Identifying factors that affect short and long term decision making
Numerous factors affects managers in their decision making process which are mentioned
below:
 Employment factors: salaries of employees affect long term decision as they are
generally employed for longer period for performing administrative activities.
Wages of labour affects the short term decision making such as in time of peak season,
employing more workers for meeting increased demand.
 Overall organisational objectives: Company is formed for some specific purpose.
Manager's decisions regarding different subject matter must not collide with company's
purpose.
 Availability of raw materials is another factor that affect decision mking related to
production activity (Shoup, 2017).
CONCLUSION
From the above project report, it can be concluded that management reports and internal
reporting is very crucial to managers at different level for taking rationale decision for de
terming the accurate costs for their product. This helps them in checking their cost efficiencies.
Factors such as raw material availability, minimum wages, machine acquiring costs affects the
short and term decision making of managers for deciding the level of output they need to
undertake.
19

REFERENCES
Books and Journals
Abel, S. and Le Roux, P., 2016. An Evaluation of the Cost and Revenue Efficiency of the
Banking Sector in Zimbabwe. 29(7). pp.5-12..(No. 629).
Becker-Peth, M. and Thonemann, U. W., 2016. Reference points in revenue sharing contracts—
How to design optimal supply chain contracts. European Journal of Operational
Research.249(3). pp.1033-1049.
Borenstein, S., 2016. The economics of fixed cost recovery by utilities. The Electricity Journal,
Dempsey, D. and Kelliher, F., 2018. Revenue Models and Pricing Strategies in the B2B SaaS
Market. In Industry Trends in Cloud Computing. (pp. 45-82). Palgrave Macmillan, Cham.
Hemel, D. J., Nou, J. and Weisbach, D.A., 2018. Appendix to'The Marginal Revenue Rule in
Cost-Benefit Analysis'. Available at SSRN 3230003.
Holzhacker, M., Krishnan, R. and Mahlendorf, M.D., 2015. The impact of changes in regulation
on cost behavior. Contemporary Accounting Research. 32(2). pp.534-566.
Kim, S., 2018. Cross-sectional variation in revenue-expense relation and cost of
equity. Managerial Finance.44(11). pp.1311-1329.
Liang, L., Xie, J., Liu, L. and Xia, Y., 2017. Revenue sharing contract coordination of wind
turbine order policy and aftermarket service based on joint effort. Industrial Management
& Data Systems.117(2). pp.320-345.
Mahendru, M. and Bhatia, A., 2017. Cost, revenue and profit efficiency analysis of Indian
scheduled commercial banks: Empirical evidence across ownership. International Journal
of Law and Management. 59(3). pp.442-462.
Manaf, N.A., Qadir, A. and Abbas, A., 2016. Agile control of CO2 capture technology for
maximum net operating revenue. IFAC-PapersOnLine. 49(7). pp.332-335.
Shoup, D., 2017. The High Cost of Free Parking: Updated Edition. Routledge.
20