Unit 13 Costs and Revenues Assignment Solution

Unit 13 Costs and revenues

Table of Contents
INTRODUCTION...........................................................................................................................1
LO 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 Responsibility centres, cost centres, profit centres and investment centre...........................2
1.4 Characteristics in different types of cost classifications and their use in costing.................2
1.5 Difference between marginal and absorption costing...........................................................3
LO 2.................................................................................................................................................3
2.1 Cost information for material, labour and expenses in accordance with organisation's
costing procedures.......................................................................................................................3
2.2 Cost information for material, labour and expenses in accordance with organisation's
costing procedures.......................................................................................................................4
2.3 Various stages of inventory...................................................................................................4
2.4 Value inventory with FIFO, LIFO and weighted average ...................................................5
2.5 Describe behaviour of different costs such as fixed, variable, semi-variable and stepped...8
2.6 Record cost information with using job, batch, unit, process and service costing systems..8
LO 3.................................................................................................................................................9
3.1 Attribute overhead costs to production and service cost centres in accordance with agreed
bases............................................................................................................................................9
3.2 Calculate overhead absorption rates in accordance with suitable bases of absorption such
as machine hours and labour hours.............................................................................................9
3.Prime cost.................................................................................................................................9
3.3 Make adjustment for under and over recovered overhead costs in accordance with
established procedures..............................................................................................................10
3.4 Review methods of allocation, apportionment and absorption at regular intervals with
implement agreed changes to methods.....................................................................................11
3.5 Communicate with relevant staff to resolve queries...........................................................11
LO 4...............................................................................................................................................12
4.1 Compare budget costs with actual costs and noting any variances.....................................12
4.2 Analyse variance for management reports..........................................................................12
4.3 Provide information for budget holders of any significant variance, making valid
suggestions for remedial actions...............................................................................................12
4.4 Prepare management reports in appropriate format with required timescales....................13
LO 5...............................................................................................................................................13
5.1 Prepare estimates of future income and costs for decision making....................................13
5.2 Effect of changing activities levels on unit costs................................................................13
5.3 Calculate effect of changing activity levels on unit costs...................................................14
5.4 Factors affecting short term and long term decision making..............................................14
CONCLUSION..............................................................................................................................15
REFERENCES..............................................................................................................................16

INTRODUCTION
In every business, revenue generated with generated product equals to the costs which
incurred in producing, selling and delivering products to ultimate customers. Break even analysis
blends with cost and revenue analysis that assists to determine new product or services to solve
financial sense (Ghiyasi, 2017). Present study based on Marks and Spencer which deals in retail
sector business. It is British multinational retailer which specialise products in selling of
clothing, home products and luxury food.
For gaining insight information of the present study, it covers relationship between
different costing systems. Furthermore, Value inventory also measure with LIFO, FIFO and
weighted average method. Moreover, it provides description of allocation, apportionment and
absorption at regular intervals with implement agreed changes to methods. At last, factors
identifying that affect short and long term decision making.
LO 1
1.1 Purpose of internal reporting and providing accurate information to management
In the Marks and Spencer, internal reporting consider important role which involves
compilation of financial and operational information on frequent basis. It is distributed in the
business to improve performances. It helps to provide accurate information to management
which includes expense trends, failure rates, detailed sales data, etc. (Shepherd, 2015). Objective
of financial reporting has been analysed and accomplish purpose to examine resources to manage
enterprise. It is also important to provide information regarding financial position, performance
and changes in enterprise. Economic decisions also taken to management to accomplish goals
and objectives.
1.2 Relationship between various costing systems
There are different types of costing systems that accumulate information based on
effective approach that mixes and matches to meet with needs. Following are different costing
systems: Historical costing: In this type of costing system, costs ascertained after it is incurred.
Main objective to ascertain cost which occur in the past. In Marks and Spencer,
accumulation of cost incurred in systematic manner. Hence, actual figures compared
when standards develop (Nguyen, 2018).
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 Absorption costing: Under this costing, all fixed and variable costs allotted with cost unit
and total overheads that absorbed as per activity level. In this system, Marks and Spencer
consider fixed manufacturing overhead that are allocated in stock valuation.
 Direct costing: In this aspect, method of costing included in which product is charged
with cost which vary with volume. In Marks and Spencer, variable and direct costs
included such as direct material, direct labour and variable manufacturing expenses
(Weisbach, Heme and Nou, 2018).
In respect to consider relationship between these costing, it can be stated that main
objectives of all costing is to set future price of product. Furthermore, it is also used for stock
valuation that helps to charge price to gain revenue and ascertained traditional form of cost
ascertainment.
1.3 Responsibility centres, cost centres, profit centres and investment centre
Following are different centres in Marks and Spencer: Responsibility centre: Responsibility centre is organisational unit that headed by manager
and responsible for different activities and results. In this aspect, Marks and Spencer must
take responsibility accounting which included revenues and cost information that are
collected and reported by responsibility centres. Cost centre: Cost centre is a part of an organisation in which costs may be charged for
accomplish accounting purposes (Yang and Chen, 2018). Profit centre: Profit centre is a part of an organisation with assignable revenues and cost
for ascertainable profitability.
 Investment centre: Investment centre is a classification which used in the enterprise and
essential element to measure its use of capital in term of raw costs or profits.
1.4 Characteristics in different types of cost classifications and their use in costing
In different types of cost classification, costing considered arriving at a company's
contribution. These types of information have been used for break even analysis. Fixed and variable costs: In Marks and Spencer, expenses separated into different
aspects such as variable and fixed cost. Revenue can be contributes as margin with
information that is used for break even analysis (Bai, Chen and Xu, 2017). Departmental costs: Expenses are assigned to Marks and Spencer which is responsible
for staff. This information, trend to examine ability.
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 Distribution costs: These types of expenses separated with each distribution channel that
used in retail, wholesale, internet, etc. stores. Aggregate amount of this classification
helps to determine channel profit (Cost classification, 2018).
 Discretionary costs: Those expenses can be temporarily reduced and eliminate that are
classified as discretionary. This approach used to reduce cost on temporary basis.
1.5 Difference between marginal and absorption costing
Following differences can be consider in marginal and absorption costing:
Marginal costing Absorption costing
Marginal costing is a method in which variable
costs considered as the product cost and fixed
cost consider within period.
However, absorption costing can be define as
the method that considered in fixed and
variable cost.
Marginal costing shows as the forth emphasis
of contribution in product cost.
On the other hand, absorption costing shows to
assess accuracy and fair treatment of product
cost.
Marginal costing is presented by outlining total
contribution.
Beside this, it is presented in most
conventional way for purpose of financial and
tax reporting (Martinek, Jorgenson and
Denholm, 2018).
LO 2
2.1 Cost information for material, labour and expenses in accordance with organisation's costing
procedures
Cost sheet of Marks and Spencer
Particulars Amount Total amount
Opening stock £6,000.00
Add: purchase £50,000.00
£56,000.00
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Less: Closing stock £7,000.00
Raw material consumed £49,000.00
Add: Direct labour £50,000.00
Add: Direct expenses £55,000.00
Prime cost £154,000.00
Add: Factory expenses £15000.00
Works cost £169,000.00
Add: Office and administration expenses £8,000.00
Cost of production £177,000.00
Add: Selling and distribution expenses £9,000.00
Total Cost £186,000.00
Profit £15,000.00
Sales £201,000.00
2.2 Cost information for material, labour and expenses in accordance with organisation's costing
procedures
In order to consider present cost sheet, opening stock in Marks and Spencer exists of
amount £6000. Furthermore, for £50000 the chosen company purchase more in which direct
labour and expenses incurred amount of £50000 and £55000 respectively. Total cost of the
enterprise is £186,000. Total sales of the company is £201,000.00.
2.3 Various stages of inventory
Inventory in manufacturing companies generally considered with cycle in four different
stages. They are as follows: Raw material: Raw material is the first stage of inventory. These are material which
helps to make final products which consider basic goods such as metal, wood, water, etc.
For instance, in Marks and Spencer different products distributed such as vegetables,
meat, grains, etc.
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 Work in progress: Once raw material are pulled in the process, it creates final product.
They can be enter in next stage of inventory which is called in WIP. It includes products
that are finalised (R. Barstow, 2019).
 Finished goods: At completion of manufacturing process, all costs are associated with
production that includes raw material and WIP costs that transferred to next stage of
inventory.
2.4 Value inventory with FIFO, LIFO and weighted average
FIFO method
Date Purchase Sales Balance
March unit
unit
cost
Tota
l unit unit cost total Unit Unit cost Total
1 68 £15.00
£1,02
0.00
5 140 £15.50
£2,1
70.0
0 68 £15.00
£1,02
0.00
140 £15.50
£2,17
0.00
9 68 £15.00
£1,020.0
0 114 £15.50
£1,76
7.00
26 £15.00 £403.00
11 40 £16.00
£640
.00 114 £15.50
£1,76
7.00
40 £16.00
£640.
00
16 78 £16.50
£1,2
87.0
0 114 £15.50
£1,76
7.00
40 £16.00
£640.
00
5

78 £16.50
£1,28
7.00
20 114 £15.50
£1,767.0
0 38 £16.00
£608.
00
2 £16.00 £32.00 78 £16.50
£1,28
7.00
29 38 £16.00 £608.00 54 £16.50
£891.
00
24 £16.50 £396.00
Working notes
Units available for sales = 68+140+40+78 = 326
Unit sold = 94+116+62 = 272
Unit in Inventory = 326-272 = 54
LIFO method
Date Purchase Sales Balance
March unit
unit
cost
Tota
l unit unit cost total Unit Unit cost Total
1 60 £15.00
£900.
00
5 140 £15.50
£2,1
70.0
0 60 £15.00
£900.
00
140 £15.50
£2,17
0.00
14 140 £15.50
£2,170.0
0 10 £15.00
£150.
00
50 £15.00 £750.00
27 70 £16.00 £1,1 10 £15.00 £150.
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90.0
0 00
70 £16.00
£1,12
0.00
29 30 £16.00 £480.00 10 £15.00
£150.
00
40 £16.00
£640.
00
31 10 £15.00
£150.
00
40 £16.00
£640.
00
Working notes
Unit Available for Sale = 60+140+70 = 270
Unit sold = 190+30 = 220
Unit in Inventory = 270-220 = 50
Weighted average
Date Purchases Sales Balance
Unit
s
Unit
Cost
Tota
l Units
Unit
Cost Total Units Unit Cost Total
31/12/
99 60 £15.00
£900.
00
5 140 £15.50
£2,1
70.0
0 60 £15.00
£900.
00
140 £15.00
£2,17
0.00
200 £15.35
£3,07
0.00
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14 190 £15.35
£2,916.0
0 10 £15.35
£154.
00
27 70 £16.00
£1,1
20.0
0 10 £15.35
£154.
00
70 £16.00
£1,12
0.00
80 £15.92
£1,27
4.00
29 30 £15.92 £478.00 50 £15.92
£796.
00
31 50 £15.92
£796.
00
Working notes
Unit available for sale = 60+140+70 = 270
Unit sold = 190+30 = 220
Unit in inventory = 270-220 =50
2.5 Describe behaviour of different costs such as fixed, variable, semi-variable and stepped
Cost behaviour is nothing more than sensitivity of changes in production and sales
volume. Following are different costs: Fixed costs: Fixed cost are those which not change with level of activity in relevant
change. These costs will incur with number of units produced. For instance, rent expenses
(Zhu, Ghosh and Rattray, 2018). Variable costs: Variable costs change in direction proportion to level of production. It
means that total variable cost increases when more units produced and diminish when
fewer units produced. Semi variable cost: Semi-variable costs are properties in which fixed and variable costs
presence. For instance, telephone expenses which usually consider fixed components
such as line rent and fixed rent, etc. (Artz, Eathington and Orazem, 2017).
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 Stepped cost: Stepped costs is amount which is not change with steadily and changes in
activity volume instead of discrete points.
2.6 Record cost information with using job, batch, unit, process and service costing systems
Following are different cost information which can be used in different costing systems: Job: Job order costing is a system for assigning manufacturing costs to each individual
product and group of products. In this aspect, products manufactured that sufficient
different from each other. Batch: Batch costing is a form of specific order costing. It is similar to job costing to job
costing in each batch where number of identical units. Each batch is separately with
identifiable cost unit (Zhang, Jiao and Chen, 2017). Unit: Unit cost is the total expenditure which incurred by the enterprise to produce, store
and sell one unit of particular product and services. Process: Process costing is an accounting methodology which traces and accumulates
direct costs and indirect cost allocates in manufacturing process. It is system where large
quantities producing for homogeneous products.
 Service: In cost information, cost is generally refers with amount that paid for receive
particular goods and services (Artz, Eathington and Orazem, 2017).
LO 3
3.1 Attribute overhead costs to production and service cost centres in accordance with agreed
bases
In production and service centres, there are following agreed bases of allocation and
apportionment: Direct: Direct cost can be defines as the price that can be completely attributed to the
production of specific goods and services. Some costs, such as depreciation or
administrative expenses are more difficult to assign for specific products. As a result, it is
considered to be indirect costs.
 Step down: Step down allocation method is approach that used to allocate appropriate
amount of cost in services provided by one department to another. It is also allocates
other costs which can be develop in operating department.
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3.2 Calculate overhead absorption rates in accordance with suitable bases of absorption such as
machine hours and labour hours
1.Raw material cost basis:
Overhead absorption rate = Estimated FOH/ Estimated material cost * 100
= $150000/$110000*100
= $136.36% of direct material
Absorption of overhead on direct material cost:
Overhead absorption rate* Actual material cost of job = Total overhead
136.36% * $240 = $27
2.Direct labour cost
Overhead absorption rate = Estimated FOH/ Estimated Labour cost * 100
= $150000/$90000 * 100
= 166.67% direct wages.
3.Prime cost
Overhead absorption rate = Estimated FOH/ Estimated Prime cost * 100
= $150000/$200000 * 100
= 75%
4. Unit of production basis:
Overhead absorption rate = Estimated FOH/ Estimated unit of output * 100
= $150000/500 * 100
= $30 per unit
Absorption of overhead based on the units of production:
Actual unit of output * overhead absorption rate= Total absorbed OHS
10 units * $30 = $300
Direct labour hours basis:
Overhead absorption rate = Estimated FOH/ Estimated unit labour hours * 100
= $150000/ 30000 hours * 100
= $5 per labour hours
Absorption of overhead based Direct labour hours basis :
Actual labour hours * overhead absorption rate= Total absorbed OHS
63 hours * $5 = $315
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Machine Hour basis :
Overhead absorption rate = Estimated FOH/ Estimated machine hours * 100
= $150000/ 25000 hours * 100
= $6 per machine hours
Absorption of overhead based on machine hours basis :
Actual machine hours * overhead absorption rate= Total absorbed OHS
44 hours * $6 = $264
3.3 Make adjustment for under and over recovered overhead costs in accordance with established
procedures
Normal working hour per annum
(No. of machine* hours per week * No of \weeks p.a.)
(28*42*48)
56448 hours
Normal loss of hours on maintenance etc. p.a.:28*5*48 6720 hours
Effective \working hours p.a. 49728 hours
Machine hour rate = $ 124320/49728 = $ 2.50
(b) Overhead absorbed = 4200 hours @ $ 2.50 $10500
Overhead incurred $10200
Over absorption $300
Wages absorbed = (28*42*4) hours @ $ 15 $7056
Wages incurred $7440
Under absorbed $344
3.4 Review methods of allocation, apportionment and absorption at regular intervals with
implement agreed changes to methods
Following are different methods of allocation, appointment and absorption at regular
intervals with implement agreed changes: Allocation method: Allocation method can be defines as the overhead costs to unit of
production. It can be applied which based on amount of direct labour that consumed by
unit of production.
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 Apportionment method: Apportionment method of accounting consider for attributing
costs to specific subject. In this method, cost assignment rely on rules and formulas
instead of measuring resources. In this way, division of income and expenses in certain
proportion show (Artz, Eathington and Orazem, 2017).
 Absorption method: Absorption method of costing means that all manufacturing costs
absorbed with producing unit. In addition to this, cost of finished units inventory included
such as direct material, direct labour, etc.
3.5 Communicate with relevant staff to resolve queries
In order to communicate with relevant staff, queries can be solved with providing
information regarding different methods of costing. It helps to increase understanding regarding
different tools and techniques and helps to communicate benefits among several members. From
above allocation, apportionment and absorption methods, allocation is the best which defines as
the overhead costs to unit of the production. It can be applied that based on amount of direct
labour which consumed by each unit of production (Shepherd, 2015). Furthermore,
apportionment method also useful which contain rules and formulas on which Marks and
Spencer can rely to measure resources.
LO 4
4.1 Compare budget costs with actual costs and noting any variances
Budget costs and actual costs contain following differences:
Budget costs Actual costs Variance
Budget costs can be defines
as accounting plan which
describe and identify
expenses for future.
As compare to this, actual cost
includes expenses which
actually incurred with delivery,
set-up charges, etc.
Moreover, variance can be
defines as difference between
budgeted or standard cost and
actual cost which incurred in
business.
Budget cost enable to
provide services and
manufacture items.
On the other hand, actual cost
enable to gain profits and final
motive of Marks and Spencer.
Beside this, variance is
important and helpful to
manage budget by controlling
actual costs.
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Comparing budget cost with actual cost
Basis Forecast Actual Variance (%) Variance ($)
Revenue 150000 165721 10.50% 15721
COGS 52500 56920 8.40% 4420
GP 97500 108801 11.60% 11301
ERITDA 48000 52098 8.50% 4098
Net Income 20000 19505 -2.50% -495
4.2 Analyse variance for management reports
In order to analysis variance, it can be stated that in Marks and Spencer forecast of
revenue has been generated is 150000 and actual return from this gain is 165721. Hence,
variance is occurred around 15721. It shows appropriate calculation and amount is right. Total
variance occur around -495.
4.3 Provide information for budget holders of any significant variance, making valid suggestions
for remedial actions
In Marks and Spencer, budget holder collect information from managers and consider
actual report. They are responsible for managing budget and regularly monitoring expenses
which monitor by whole team. Furthermore, it has been analysed that there is no accurate budget
set so that it is essential to the organisation to analyses all variance and then make expected
results better.
4.4 Prepare management reports in appropriate format with required timescales
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LO 5
5.1 Prepare estimates of future income and costs for decision making
With respect to take decision, following elements consider in it: Relevant cost: In this method, avoidable cost consider which incurred to make effective
and successful business. Break even analysis: It is one another financial tool that is used to consider actual stage. Margin of safety: This element consider to analysis difference between actual sales and
break even analysis. Hence, managers are actually utilised to determine that how sales
decreases. Target profit: It is amount that is expected and managers are actually developed to
achieve in accounting period.
 Limiting factor: It defines as shortage of resources such as material, labour, men, etc.
(Shepherd, 2015).
5.2 Effect of changing activities levels on unit costs
In order to make changes in the unit cost, it can be stated that total expenses incurred in
the chosen business to produce more products and services. For instance, fixed, variable, direct
& indirect labour, etc. All these elements create major impact due to increasing expenditure and
low profitability as well.
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Illustration 1: Cash flow statement
(Source: Marks & Spencer Group PLC – MKS, 2018)

5.3 Calculate effect of changing activity levels on unit costs
5.4 Factors affecting short term and long term decision making
Factors affect to short term decision making Brand impact: For Marks and Spencer, brand impact create impact on short term
decision making that assists to develop sales of goods in the business. It makes more
profitability that create impact on organisation profits.
 Return on investment: Return on investment create impact for short term because it
negatively influences profits of the enterprise (Weisbach, Heme and Nou, 2018).
Factors affect to long term decision making High risks: Due to different risks, such as finance, Marks and Spencer has major impact.
Long term decisions break its productivity.
 Long term resources: Furthermore, long term decisions consider major impact because
of organisational wealth and prosperity.
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CONCLUSION
From the above report, it can be concluded that cost and revenue are two essential
elements of any business. In this regard, report based on Marks and Spencer which consider
internal reporting to record and provide essential information within the enterprise. Furthermore,
it summarised about different types of costing system that can be used by the organisation to
develop significant advantages in the business.
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REFERENCES
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Ghiyasi, M., 2017. Inverse DEA based on cost and revenue efficiency. Computers & Industrial
Engineering. 114. pp.258-263.
Martinek, J., Jorgenson, J. and Denholm, P., 2018. A comparison of price-taker and production
cost models for determining system value, revenue, and scheduling of concentrating
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Nguyen, T.P.T., 2018. Comparison of efficiency and technology across the banking systems of
Vietnam, China and India: a stochastic cost and revenue meta-frontier approach.
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Shepherd, R.W., 2015. Theory of cost and production functions (Vol. 2951). Princeton
University Press.
Weisbach, D.A., Hemel, D.J. and Nou, J., 2018. The Marginal Revenue Rule in Cost-Benefit
Analysis. Tax Notes. 160(11). pp.1507-1528.
Yang, H. and Chen, W., 2018. Retailer-driven carbon emission abatement with consumer
environmental awareness and carbon tax: Revenue-sharing versus cost-sharing. Omega.
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Zhang, S., Jiao, Y. and Chen, W., 2017. Demand-side management (DSM) in the context of
China's on-going power sector reform. Energy Policy. 100. pp.1-8.
Zhu, Y., Ghosh, M. and Rattray, J., 2018. Revenue recycling and cost effective GHG abatement:
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Online
Aisha, P., 2019. Top 6 Types of Costing Systems | Cost Accounting. [Online] Available through:
<http://www.accountingnotes.net/cost-accounting/costing-system/top-6-types-of-
costing-systems-cost-accounting/10166>.
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