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

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.