Managing Financial Resources: Calculation of Costs, Grouping of Costs, and Analysis

This report discusses managing financial resources through calculation of costs, grouping of costs, and analysis. It covers Costa's prime cost, production cost, selling and distribution cost, and administrative expenses. It also explains the concepts of budgeting and forecasting, variance analysis, adverse and favorable variance, and flexible budget with examples.

MANAGING FINANCIAL
RESOURCES

Table of Contents
INTRODUCTION...........................................................................................................................3
SECTION A.....................................................................................................................................3
Question 1....................................................................................................................................3
SECTION B.....................................................................................................................................6
Question 3....................................................................................................................................6
Question 4....................................................................................................................................7
CONCLUSION................................................................................................................................9
REFERENCES..............................................................................................................................10

INTRODUCTION
The present report based on “Managing financial resource” involves calculation of costs related
to different heads of cost sheet for Costa where each element has been defined and calculated
costs are interpreted accordingly. Also, different costs have been classified to their respective
categories for a cloth manufacturing company. Further, various concept of cost accounting such
as budgeting and forecasting, variance analysis, adverse and favorable variance and flexible
budget has been discussed through example.
SECTION A
Question 1
Calculation of costs for Costa
a. Prime cost: It refers to the overall direct costs associated with production of products which
includes cost of direct materials, cost of direct labor and many more direct expenses such as
royalties, cost of utilizes such as fuel and power, etc. where adding up all these direct costs gives
the prime cost (Ekergil and Göde, 2020). For Costa, prime cost can be calculated as follows:
Particulars Description Amount in £
Direct material costs Raw materials utilized in
production
320000
Direct labor costs Cost of labor directly connected
with production
200000
Direct expenses Royalties 3600
Prime cost 523600
In the above table, it can be seen that how combining all the direct costs of Costa, prime cost has
been determined. In the given case, to calculate prime cost, first of all costs associated with three
different elements of prime cost that is, direct material, direct labor and direct expenses has been
identified and then by adding up all the costs that is, direct material consumed in production, cost
of labor directly connected with the production process and royalties as a direct expense, prime

cost has been calculated. Therefore, it can be said that prime cost is that direct cost which
incurred during the manufacturing process while producing a product.
b. Production cost: It is also known as cost of production which is the combination of both
direct and indirect costs associated with the manufacturing process that is, it incurred by business
while producing a product or providing services (Zafarzadeh, Mollanazari and Khadivar, 2021).
It can be defined as the sum of factory related overheads and costs and prime costs. There are
various expenses included in the production cost such as cost of raw materials, labor, supplies,
consumable manufacturing and general overheads. For Costa, production cost has been
calculated as follows:
Particulars Description Amount in £
Prime cost (as determined above) 523600
Production Overheads
Wages paid to supervisors in
factory
120000
Depreciation Machinery used in production 8000
Buildings (1/2 related to
factory)
5000
Computer overheads 2/3 is associated with factory 6000
Other production overheads 70000
Production cost 732600
From the above table showing calculation of production cost, it has been identified that
cost of production is the composition of prime cost and all those costs that incurred in or
associated with factory. To calculate production cost, various costs are required to be bifurcated,
so that actual costs associated with different activities of the business can be determined
correctly and accurately. Like in the given case, depreciation of building and machinery has been
taken into consideration to the extent it has been utilized for the purpose of production and also
the same treatment has been done for computer overheads with the aim of calculating total cost
linked to the manufacturing process or factory itself.

c. Other costs split between Sales or distribution and administrative expenses: Costs
associated with sales or distribution and administrative activities are known as cost of sales
which is deemed to have incurred for the purpose of making a product available among the
customers and thus calculated by adding up all those expenses that are associated with
administration, selling, distribution and marketing expenses. Administrative expenses include
costs associated with depreciation or maintenance company’s assets and other management
expenses such as salaries of accountants, employees and managers, operating expenses such as
rents, rates, office supplies and legal charges or fees (Magrini, Dal Pozzo and Bonoli, 2022).
Selling expenses refers to the cost associated with the selling of product or service in the market
such as salaries or wages paid to employees of sales department, advertisement and market
research costs. Distribution expenses refers to such costs incurred in an attempt to make product
available to final consumers such as salaries or wages paid to employees engaged in the
distribution of products, transportation costs and other costs associated with distribution vehicles.
Selling and distribution costs are generally compiled together. For Costa, Selling or distribution
and administrative expenses have been calculated as follows:
Particulars Description Amount in £
Selling and distribution
overheads
Wages associated with selling
and administration
18300
Salaries Marketing 25000
Commission paid to sales
staff
1200
Depreciation ¼ of building depreciation 2500
Delivery vans 3500
Total costs of selling and
distribution
50500

In the above table, by compiling together all the costs associated with selling and distribution
department such as salaries, wages, depreciation of assets used for sales and distribution, total
costs associated with selling and distribution activities of Costa has been calculated.
Particulars Description Amount in £
Administrative expenses
Salaries of administrative
workers
90800
Computer overheads 1/3 associated with
administration
3000
Interest on loans 3000
Depreciation Office fixtures and fittings 4200
¼ of building’s depreciation
is associated with office
2500
Total administrative
expenses
103500
d. Total cost: This is the overall costs incurred by business associated with all the activities that
has been performed during the specified period and are calculated by compiling together all the
costs calculated for different heads of the cost sheet that is, prime, cost, production cost, selling
and distribution cost and administrative expenses (Ma, Yan and Yao, 2021). For Costa, the total
cost associated with their business operations can be calculated as follows:
Particulars Description Amount in £
Prime cost and Production
cost
As determined in (a) & (b) 732600
Selling and distribution
expenses
As determined in (c) 50500
Administrative expenses As determined in (c) 103500
Total cost 886600

SECTION B
Question 3
Grouping of costs
S. No. Particulars of costs Category of costs
1 Lubricant for sewing machines Indirect product overhead
2 Maintenance contract for general office photocopying
machine
Administration cost
3 Telephone rental plus metered calls Administration cost
4 Interest on bank overdraft Finance cost
5 Market research undertaken prior to a new product
launch
Selling and distribution
cost
6 Basic raw material Direct materials cost
7 Royalty payable on number of units of product XY
produced
Direct expenses
8 Road fund licenses for delivery vehicles Selling and distribution
cost
9 Wages of operatives in the cutting department Direct labor cost
10 Developing a new product in the laboratory Research and
development cost
Question 4
Analysis with example
1. Budgeting and forecasting: Budgeting can be defined as quantification of expected revenue
that the business aims to achieve within the future period while the forecasting is helpful for
management in determining whether the business is headed in the right direction or not
(Anderson and et.al., 2020). Both budgeting and forecasting are tools that helps management in
planning for future and ensuring that the business goals and objectives will be achieved at the
end of period. Through budgeting, management gets financial direction and accordingly,
quantification of revenue that the management is expecting to achieve within a given future

period are done. On the other hand, through forecasting, estimation of amount of revenue and
income accordingly is done that is needed to be achieved in the upcoming duration (Farr, 2019).
In budgeting, variances at the end of period has analyzed against the actual performance whereas
no such analysis of variances takes place in case of forecasting. As against this, forecasting
allows management in how they should allocate the budgets for the upcoming future period.
Example of budgeting is, a company preparing sales budget in order to project sales of the
company while production budget to project how much production does a company need to do
for the upcoming future period.
Example of forecasting in business are determination of feasibility that there would be
competition faced from existing competitors, measurement of possibility related to creation of a
product’s demand.
2. Variance analysis: It refers to the determination of difference that has occurred between the
actual performance as against what has been planned for the given period. It can be both
favorable and unfavorable where in the former case the actual performance is higher than the
planned one and in the latter case the actual performance are less than the planned performance
(Olszewska, 2019). By summing up all the variances associated with a given reporting period, a
picture of whether there is over or under performance can be created.
Example of variance analysis, if the standard cost exceeds the actual cost despite of consuming
the same quantity of materials, then such condition indicates that there are favorable price
variances because the actual costs are less the planned cost. Like 100 kg of raw material was
budgeted to cost £10000, however at the end of budget period the actual cost of raw materials
comes out to be £9000 only. Therefore, there is favorable price variance of £1000.
3. Adverse variances: It refers to such unfavorable variances where actual expenditure exceeds
budgeted expenditure and the actual income is less than that of budgeted one (Sotiriadis, 2018).
It is quite similar to that of deficit where there is less income available to cover total expenditure
associated with the given period. There could be many reasons for adverse variance such as
changes in economic conditions or market situation (entrance of new competitor).
For example, adverse variance could be understood well through quoting example from dual
point of view that is, from income and expenditure both. If the budgeted sales revenue for the

period was £3 million while the actual sales realized at the end of this period is £2.75 million.
Therefore, the difference of £250000 sales is known as adverse variance because revenue
realized is less than the budgeted one. Also, from the expenditure point of view, if the budgeted
cost of direct materials was £5 million whereas the actual cost of direct materials incurred during
the budgeted period is £5.5 million, then the difference amount of £500000 is the adverse
variance.
4. favorable variance: Unlike adverse variance, favorable variance occurs where actual income
or sales realized at the end of budget period exceeds the planned income or sales whereas the
actual expenditure incurred during the budget period is less than what has been planned while
setting budget (KHAMATKHANOVA, 2018). Therefore, there would be favorable conditions
for business in the event of favorable variance because this signifies that actual performance is
higher than that of planned performance.
For example, favorable variance can also be understood well with the help of example based on
both income and expenditure. If the budgeted sales are £5 million and actual sales realized are £6
million, then there is favorable variance amounting to £1 million. Similarly, if budgeted cost of
direct labor was £500000 and the actual cost incurred for hiring direct labor is £480000, then
there is £20000 favorable variance.
5. Flexible budget: It refers to such method of setting budget where the figures within the
budget gets adjusted with the level of activity or volume of a company (Osadchy and et.al.,
2018). Such format of budgeting allows for evaluating manager’s performance along with acting
as good tool for planning done by management as manager can establish financial modelling
through which financial results can be analyzed at different levels of activities.
For instance, if a company is using flexible budget where there are 10 million budgeted as sales
and 5 million as costs of goods sold which comprises of 2 million fixed and 3 million variables
that is, variable cost of goods sold is 30% of sales. If at end of budget period, there are actual
sales amounting to 9 million only, then by keeping fixed as 1 million, the actual variable cost of
goods sold would be 2.7 million only which is equivalent to 30% of actual sales revenue.

CONCLUSION
From the above assignment, it has been concluded that management of financial
resources is very necessary within all types of business concern through creating budgets,
calculating and analyzing costs, etc. This is because with the appropriate financial resource
management, performance of the firm can be improved and increased.

REFERENCES
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