Managing Financial Resources: Calculation of Prime Cost, Production Cost, Sales/Distribution Cost and Total Cost

This article provides a detailed calculation of Prime Cost, Production Cost, Sales/Distribution Cost and Total Cost in managing financial resources. It also covers topics such as budgeting and forecasting, variance analysis, flexible budget, favourable variances, static budget, average daily rate, revenue per available room, average length of stay, market penetration index, and customer satisfaction.

Managing Financial
Resources

TABLE OF CONTENTS
SECTION A ....................................................................................................................................3
Question 1 ..................................................................................................................................3
SECTION B ....................................................................................................................................7
Question 4 ..................................................................................................................................7
Question 6 ..................................................................................................................................8
REFERENCES..............................................................................................................................11

SECTION A
Question 1
Costa's Calculation
(a) Prime cost
Particulars Amount £
Royalties 3600
Raw materials used in production 320000
Direct labour costs which is connected with
production
200000
Total 523600
From the above mentioned calculation it has been evaluated that Prime cost can be
calculated as direct cost for the company's production, which also includes raw materials, direct
labor cost (Yureneva, Barinova and Golubeva, 2018). The company needs to calculate this cost
of each of the good which is manufcatured in order to find out whether they are generating a
profit or not. Prime cost refers to a manufactured cost of product, which are calculated by the
company to ensure the profitability. To find out prime cost add- royalties, raw materails which is
used in production and labour cost ( direct) connected to production (Prime cost, 2022). It has
been also identified that by lowering cost, a company can raise its profit margin and decrease its
competitors cost.
Raw materials used in the company's production include supllies consumed during the individual
units of production.
(b) Production cost
Particulars Amount £
Wages of factory supervisors 120000
Computer overhead expenses(2/3 factory) 6000
Depreciation- building(1/2 factory) 5000
Machinery which is used in production 8000

Other production overheads 70000
Total 209000
Buildings- 1/2*10000= 5000
computer expenses= 2/3* 9000= 6000
Production costs is the cost a firm incurs from manufacturing process of product or
services and offers a service that generates revenue for the organisation. Production cost of the
company includes different expenses such as manufacturing supplies, overhead, materials and
labor (Sun and et.al., 2019). From the above calculation, it has been interpreted that by adding
machinery, depreciation of building, computer overhead expense and wages, production cost
can be generated, The total production cost of Costa is 209000.
Depreciation means how much of value of an asset has been used, in other words it is the
accounting method used by company to allocate the physical asset or cost of tangible over its
useful life. This situation occurs due to various factors which includes unfavourable market
conditions.
(c) Sales / Distribution
Particulars Amount £
Wages include selling and administration 18300
Salaries- Marketing 25000
Commission paid to sales staff members 1200
Depreciation- delivery vans 3500
Building (¼ sales) 2500
Total sales 50500
Building= 1/4*10000=2500

sales and distribution is the expenses done by company's sales department which includes
wages of workers, salaries of employees , staff commission, delivery vans (Aghara and et.al.,
2018). Distribution cost includes shipping, logistics, marketing cost includes social media
maintainance, selling costs includes wages and other commission expenses (Mo, Park and Kim,
2018). From the above mentioned table it has been evalauted that, By adding all of the selling
expense and distribution the company can get total sales/ distrubution expenses.
Admistrative expenses
Particulars Amount £
Computer overhead expenses in
administration( 1/3 )
3000
Salaries of administrative employees 90800
Interest on loans 3000
Depreciation building ( ¼ office ) 2500
Office fittings and fixtures 4200
Total expenses 103500
Computer expenses= 1/3*9000= 3000
building= 1/4*10000=2500
Administrative expenses are the expenses a company incurs that are not directly
connected to a specific core function which includes sales, manufacturing process, production of
goods. Overheads comprise of indirect employee costs, indirect raw materials, indirect expenses
which are not dircetly connected to cost object. From the mentioned table, it has been interpreted
that salaries of employees (adminitrative), office fittings and fixtures and loans are included in
Costa statement. By adding all the expenses, company can get its total administrative expenses.
(d) Total cost
Particulars Amount £
Production cost 732600

Sales and distribution 50500
Administrative expenses 103500
Total 886600
All the indirect cost are known as overheads which can be classified into various
categories such as selling overheads, adminitration overheads, office overheads, distribution
overheads and factory overheads (Liu and et.al., 2021). Total cost of the company means total
expenses incurred in reaching the level of output, from the above table, the company can easily
understand each and every expenses. By adding sales and distribution, production cost and
adminitrative expenses, total cost can be generated that is £886600. from this calculation, the
company can easily understand its business and financial health. Prime cost can not be included
in it because it is direct cost so, all the indirect expenses has been be added.

SECTION B
Question 4
1. Budgeting and forecasting - Budgeting is all about creating a proper plan to spend the
amount, which helps the company to determine in advance whether company has enough amount
to do business and related things. In other words, budgeting is planning about finance which also
includes resource quantities, cash inflow and outflows, expenditures and income and revenue and
sales. For example- The budget holder of the company decides about how much of the firm's
budget is allocated to each and every department. From which the manager of the firm make
decision and plan important tasks, thus preparing proper budget is necessary to keep company
out of debt. It will help the firm to work effectively which is beneficial for smooth running of
business.
Once the budget is created it is important to keep track on the finance so that company's
health can be known easily. By doing this, one can easily forecast and plan things according
based on finances, so that business operations can be more manageable. By proper planning of
budget, one can easily extend their business in the future which allow forecasting how much
amount is required to save for important thongs such as emergency funding.
2. Variance analysis- This is the method used by people to understand the detailed
information about planned behaviour versus actual behaviour in budgeting process (Dai and
et.al., 2021). With the help of this analysis, people can easily understand the concept of how
business performance is being impacted. For example- if company budget for sales to be $5000
and actual sales are $3000, variance analysis yields a difference of $2000. Sales during the
month were $2000 lower than the actual budget of $5000. This variance was caused by the loss
of customer at the end of the month which is known as preceding month, which usually buys
things at $1500 per month from the firm. The company lost that customer because of late
deliveries, so with the help of this example management can understand why fluctuations occurs
in business. And also what are the measures can be helpful to change the situation.
3. Flexible budget- It is the budget which is helpful to track where the company can
adjust their spending each month. Thus, it is most popular budget which is more accurate in
nature reflects the state of company's finances. For example- management of the company make

estimation what the budgeted numbers would look like at different levels of sales. It has been
prepared for mangers for assumptions of cost as the original budget.
4. Favourable variances- when the variance improves net income then it is known as
favourable variance. In other words, when actual revenues is more than budgeted amounts then it
comes under the category of favourable variance. For example- lets say if the company expected
to pay around $50000 for maintenance of equipments and tools, but was able to contract a price
of $15000, they'll have a favourable variance of $35000.
5. Static budget – The static budget means the budget that remains the same even if there
are changes seen from the business related assumptions or about outputs and inputs during
planning. In addition, the numbers from this budget can be slightly different from the actual
results. For example- the company expense for marketing campaigns and digital marketing is
$40000, for the duration of the period. It is totally depended upon the managers to adhere that
amount regardless of how the cost of generating that marketing campaign whether it actually
tracks during the time period.
Question 6
1. Average daily rate- It is helpful to measure the average rental revenue which earned
for an occupied hotel room per day. It has been used by company to measure the operating
performance of a hotel and any other business. This formula is one of the key performance
indicators used by industry. Hotels can improve the ADR through promotional activities and
price management systems. Nowadays, hotel operators are more focused on improving ADR
with the help of pricing strategies. Also, hotel industry seek to adjust the price of room in order
to match the current trends and demand. For example- it is majorly used in the hospitality sector
to evaluate the strength of revenues which has been generated. If a hotel has $40000 in room
revenue and 400 rooms sold, the Average daily rate would be $100.
2. Revenue per available room- Hospitality industry used this formula to find out the
performance measure. They say that an increase in a property's revenue per available room does
not mean greater profitability. With the help of RevPAR, company can find out the ability of
property to fill its available room at an average rate. One can find out revenue per available room
by dividing total room revenue by total numbers of rooms available. Another formula is when
occupancy rate is multiplied by average daily rate then revenue per available room is generated.

For example- lets says if the hotel is occupied at 50% with an ADR of $100, then revenue per
available room will be $50.
3. Average length of stay- This is the most common formula one can use to calculate
length of stay. It is calculated by adding the total number of stay in the month for discharge
resident and dividing it by the number of people discharge in a month. With the help of this
formula one can find out the efficiency of hospital management. For example-
A healthcare facility :
Patient Date of admission and leaves Total stay
A January 2 to January 4 3 days
B January 2 to January 3 2 days
C January 14 and leaves the
same day
1 days
D January 17 to January 26 8 days
Total 15 days
The average length of stay= (3+2+1+8) days/ total 4 patient stays = 15/4= 3.5 days.
4. Market Penetration Index (MPI)- This method is used by company to measure how
hotel's occupancy compare to a preselected bunch of competitors (Tripathy and Sane, 2021). In
other words, one can understand their potentially and generally, how business operations is doing
in relation to company's competition and market. It is a tool used by company when considering
pricing against that of their competition. One can easily place themselves among the competition
and make competitor based pricing and important decisions with the help of market penetration
index. For example- if there are 300 million people in a London and 65 million of them own car,
the market penetration of car would be 22%.
5. Customer satisfaction- This is the most important factor which needs to taken into
account to become successful in the business market (Khan and Hashim, 2020). It is a
measurement that determines how happy clients are with the services of company, products and
their capabilities to handle situation. A company needs to measure about the satisfaction level of
the customers with the help of surveys, feedback, ratings and various tools like key performance

indicators. It will help the company to improve and make necessary changes to its services and
products as per customer trends, requirements, needs, wants and preferences.
The company can make questionnaire such as-
▪ How satisfied are you with our services and product availability?
▪ What do you like or dislike about our product ?
▪ How well does our services meet your expectation?
▪ What would you like to change in our product, provide suggestion?
For example- By sending customer emails, messages and personal interview to collect feedback
about their experiences is helpful to understand likes and dislikes of customers. Company will
send email to customer and ask them to rate their experience from 1 to 10 or from excellent to
poor.
Calculation = customer satisfaction(CSAT)
If amazon had 50 positive responses out of 100 total responses than CSAT score would be
= number of positive responses/ total number of responses * 100
=50/100×100
=50%

REFERENCES
Books and Journals
Aghara, V. N. and et.al., 2018. Sales promotion as a leverage strategy for improving sales and
profitability in alcohol beverage industry. International research journal of management,
IT and social sciences. 5(4). pp.18-25.
Boukari, M. and Veiga, F. J., 2018. Disentangling political and institutional determinants of
budget forecast errors: A comparative approach. Journal of Comparative
Economics. 46(4). pp.1030-1045.
Dai, M. and et.al., 2021. A dynamic mean-variance analysis for log returns. Management
Science. 67(2). pp.1093-1108.
Khan, M. A. A. and Hashim, H., 2020. Tourist satisfaction index for tourism destination,
integrating social media engagement into the European customer satisfaction index: a
conceptual paper. International Journal of Academic Research in Business and Social
Sciences. 10(9). pp.72-90.
Liu, Z. and et.al., 2021. Comparing total cost of ownership of battery electric vehicles and
internal combustion engine vehicles. Energy Policy. 158. p.112564.
Mo, K., Park, K. J. and Kim, Y., 2018. CEO pension and selling, general and administrative cost
stickiness. International Journal of Entrepreneurship. 22.
Sun, X. and et.al., 2019. Manufacturer encroachment with production cost reduction under
asymmetric information. Transportation Research Part E: Logistics and Transportation
Review. 128. pp.191-211.
Tripathy, L. K. and Sane, S., 2021. Market Penetration Strategies to influence the Level of
Impulse Buying for Electric Cars in India. Design Engineering, pp.4304-4312.
Yureneva, T., Barinova, O. and Golubeva, S., 2018, October. Forecasting the prime cost of milk
production in an uncertain environment. In The International Science and Technology
Conference" FarEastСon" (pp. 678-693). Springer, Cham.
Online
Prime cost. 2022. [Online]. Available through:
<https://www.researchgate.net/publication/26844084_Variability_Analysis_of_Prime_Cos
t_Sums>