Cinto Ltd Costing and Budgeting Analysis: Finance Report

This report delves into the core principles of cost accounting and budgeting, offering a comprehensive analysis of various costing methods and their implications. It begins by examining cost behavior and classification, differentiating between absorption and variable costing methods, and discussing their impact on financial reporting. The report then explores the complexities of overhead allocation, applying Activity-Based Costing (ABC) to apportion overheads within Cinto Ltd across different market segments, and calculating operational profit. Furthermore, the report examines the human aspects of budgeting, assessing the impact of different management approaches on employee performance and revenue generation within a hair salon setting, highlighting the importance of employee involvement and motivation in achieving budgetary goals. The report concludes by emphasizing the significance of accurate costing and effective budgeting for informed financial decision-making and improved profitability.

Measurement and
Decisions-Making

Table of Contents
INTRODUCTION ..........................................................................................................................3
TASK 1: COST BEHAVIOR AND COST CLASSIFICATIONS ..................................................3
TASK 2: UNDERSTANDING OVERHEADS ..............................................................................4
a) ............................................................................................................................................4
b).............................................................................................................................................5
c) ............................................................................................................................................6
d).............................................................................................................................................6
TASK 3: HUMAN ASPECTS OF BUDGETING...........................................................................7
a) ............................................................................................................................................7
b).............................................................................................................................................7
d).............................................................................................................................................8
CONCLUSION ...............................................................................................................................8
REFERENCES................................................................................................................................9

INTRODUCTION
Every business organization whether manufacturing or service provider incur different
types of cost while carrying out their operations. Cost accounting records all the expenditures
incurred by an entity which aims is to determine the total cost. The aim of the present assignment
is to evaluate and discuss different types of costing method available to the entrepreneur for their
cost determinations. Moreover, ABC costing will be applied to apportion Cinto Ltd's overheads
to its operational segments and measure profitability. In the end, the report will discuss the role
of human aspect in the budgeting.
TASK 1: COST BEHAVIOR AND COST CLASSIFICATIONS
The identification of cost for various activities and products is considered to be an
essential element for the organization. The businesses tend to incur wide range of costs in the
form of variable and fixed costs. In present case, fixed manufacturing overheads accounts for
around 30% of total manufacturing cost. This cost can be accounted for as different ways in
financial statements and cost sheet. The financial statements majorly satisfies information needs
of external stakeholders. However, cost and production reports are suitable to meet the
requirements of internal stakeholders. The overhead costs can be accounted to external
stakeholders majorly in two different ways as follows:
Absorption Costing: The method of absorption costing emphasizes on recording costs
such as direct material, direct labor, variable & fixed manufacturing overhead as a part of
product costs (Fisher and Krumwiede, 2015). On other hand, selling, distribution and
administrative expenses are considered as period cost. The selling, distribution and
administrative cost is further classified into variable and fixed component. As per the absorption
costing, Jason day should account for manufacturing overhead as a part of product cost
(Balakrishnan, Labro and Soderstrom, 2014). The same approach is adopted by Nilstrom
Industries presently to account for manufacturing overheads. Maria Crane, vice president of
operations also found the approach to be suitable for reporting overhead cost. This approach
directly allocates the overheads to product cost which in turn lowers profitability.
Variable Costing: As per the variable costing approach, fixed manufacturing overhead
forms part of period costs. The approach segregates manufacturing overhead into two
components: fixed and variable. Fixed component forms part of period costs and variable
component forms part of product costs (Nawaz, 2013). It is through adoption of variable costing

that the organization is able to ascertain true profits.
Nilstrom Industries is facing issue of high amount of fixed manufacturing overheads. The
organization should adopt variable costing methodology to account for its fixed manufacturing
overheads. This in turn results in displaying a true profitability that is generated over the period
of time. As per the claim of vice president of operations the business unit is accounting for its
overhead as cost of production. As a result product cost has been increased that has resulted in
reducing business profitability. The variable costing approach will assist in reducing direct cost
of operation so as to estimate true value of profits.
Internal record-keeping is done by preparation of cost sheets and production sheets. It is
through preparation of cost sheets in every department that overheads at different levels can be
estimated. This in turn helps in allocating costs to direct and indirect portion of expenditure. The
fixed manufacturing overheads such as rent, etc. should be recorded as a part of production or
cost sheet. The manufacturing overheads then are allocated to products manufactured so as to
decide the appropriate selling price. The internal recording is necessary to forecast future
financial requirements (Jorgensen, Patrick and Soderstrom, 2012). It also provides assistance in
estimating future profitability of the business unit. The internal recording is considered to be
valuable since it helps in understanding the achievement of budgeted figures. Further, internal
recording should also be done on the basis of variable costing approach. The same is recorded as
operating expenses in income statement so as to report to external stakeholders.
TASK 2: UNDERSTANDING OVERHEADS
a)
Gross profit (GP) indicates the surplus of total turnover over cost of sale while the
percentage of GP on the total sales is known as gross margin % (GM) (Proctor, 2012). Scenario
states that Cinto Ltd is operating in three market segments, that are General Supermarket chains,
Pharmacy chains and Pharmacist-owned single stores. Firm can compute their GM by using
following formula:
GM % = [(Total revenue – cost of goods sold)/Total sales]* 100
Cinto Ltd, 2014 General
supermarket
chains ( In $)
Pharmacy
chains
( In $)
Pharmacist-
owned single
stores ( In $)
Total ( In
$)

Revenues 3708000 3150000 1980000 8838000
Cost of goods sold 3600000 3000000 1800000 8400000
Gross profit (Revenue - COGS) 108000 150000 180000 438000
Gross margin % (GP/revenues)*100 2.91% 4.76% 9.09% 4.96%
b)
According to ABC costing, cost driver rate indicates the overhead incurred on each unit
of the various cost drivers (Hessong. 2013). As per the given scenario, Cinto Ltd's indirect
expenditures are based on five activities that are number of orders, line items ordered, store
deliveries, cartons shipped and shelf stocking hours as well. It can determine cost driver rate
using following formula:
Cost driver rate = Total overhead incurred/total activity level
Activity
areas
(1)
Cost driver
(2)
General
supermark
et chains
(3)
Pharmacy
chains
(4)
Pharmacist-
owned single
stores
(5)
Total
activity
level (6)
(3+4+5)
Total
cost
(In $)
(7)
Cost driver
rate (In $)
(7/6)
Order
processing
Number of
customer
purchase orders
140 360 1500 2000 80000 40 per order
Line item
processing
Number of lien
items ordered by
customers
1960 4320 15000 21280 63840 3 per line
item
processed
Delivering
to store
Number of store
deliveries
120 360 1000 1480 71000 47.97 per
store deliver

Cartons
shipped to
stores
Number of
cartons shipped
36000 24000 16000 76000 76000 1 per cartons
shipped
Stocking of
customers
store
shelves
Hours of shelf-
stocking
360 180 100 640 10240 16 per hour
of shelf-
stocking
c)
Calculation of operational profit in dollar and as % of revenues as per ABC costing
Traditional cost accounting method often use labour hours as a basis of their overheads
apportionment which is not a right base (Horngren and et.al., 2013). ABC costing overcome this
limitation as according to this, overheads must be assigned to every market segments on the basis
of their cost driver (Kaplan and Anderson, 2013). With regards to the current scenario, various
overheads are allocating here as per their cost driver rates, done below:
Cinto Ltd, 2014
Cost driver
General
supermarke
t chains
Pharmacy
chains
Pharmacist-
owned
single stores
Total (In $)
Revenues Given 3708000 3150000 1980000 8838000
COGS Given 3600000 3000000 1800000 8400000
Gross profit Revenue – COGS 108000 150000 180000 438000
Order processing
Number of customer
purchase orders 5600 14400 60000 80000
Line item processing
Number of lien items
ordered by customers 5880 12960 45000 63840
Delivering to store
Number of store
deliveries 5756.76 17270.27 47972.97 71000
Cartons shipped to
stores
Number of cartons
shipped 36000 24000 16000 76000
Stocking of customers Hours of shelf-stocking 5760 2880 1600 10240

store shelves
Total overhead 58996.76 71510.27 170572.97 301080
Operating profit
Gross profit – total
overhead 49003.24 78489.73 9427.03 136920
Operating profit as %
of revenue
Operating profit
/revenues*100 1.32% 2.49% 0.48% 1.55%
d)
ABC costing technique provides more realistic and authentic results about the total cost
and operational profit as well. It is because, this method helps to apportion overhead on the basis
of different cost driver. With reference to Cinto Ltd, cost driver rates has been determined for the
allocation of different overheads to all the three market segments. While, if company use
traditional costing than it will use a uniform basis of labour hours for the cost apportionment.
Henceforth, it will definitely provide incorrect information about cost and profit of every market
segment (Drury, 2013). According to the results, it has been founded that operating profit of
General Supermarket chains, Pharmacy chains and Pharmacist-owned single stores are
$49003.24, $78489.73 and $9427.03 while as revenue %, they are 1.32%, 2.49% and 0.48%
respectively.
TASK 3: HUMAN ASPECTS OF BUDGETING
a)
Jack Milatic is facing an issue of rising utility costs in three of the hair salons. It is
essential for the business unit to increase revenue so as to have sufficient level of profit margins.
The three of hair saloons have distinct set of suggestions for increasing revenue. Manager of Hair
Suite 3 has adopted the most feasible solution. At Hair Suite 3, Manager has taken into
consideration view point of all the stylist. This in turn helps in affecting their performance. The
stylist are expected to perform with high level of co-ordination since their suggestion is
implemented. In case of stylist 1, time to serve clients has been reduced. This in turn is going to
indirectly generate revenue since time means money in operating a business. At hair Suite 2,
manager has forced stylists to work for an extra hour without their consent. A few of stylist may
be satisfied with revenue that are generated in normal working hours. This in turn creates a sense
of dissatisfaction among them. Henceforth, the strategy adopted by manager at hair suite 3 is
proved to be the most feasible in nature.

b)
Hair Suit 1st manager decides to decrease customer serving as well as cleaning time to
enhance revenue. Their stylists may be unhappy because they might feel some stress that how the
clients can be served within the short-duration of 40 minutes. Moreover, they may also feel that
managers are providing insufficient time to clean the place which may results in mental stress.
On the other hand, Hair Suit 2nd manager decides to provide a voluntary basis to work for 1 extra
hour each day. It may promote and encourage stylists because they can receive extra income by
serving more customers.
c)
If the manager of 3rd Hair Suite does not willing to share their workstations with another
party than an alternative action available to maximize revenue is that they can increase the
working days from 5 to 6 days. By this, stylists can get benefits by obtaining larger revenue
whereas Salon can enhance their earning by receiving 10% of Stylists additional revenues.
d)
Manager of 1st Hair Suite planned to minimize the time of customer service and cleaning
as well. It will assist manager to enhance their revenue as now, each stylists can serve 1
additional client per day. Overall, Stylists can serve 10 additional customers each day. By this,
stylists can maximize their earnings in the terms of higher sales whereas manager will be able to
get extra earnings because they will gain 10% of the additional income received by all the 10
stylists.
CONCLUSION
Report concluded that Nilstorm industry must use variable costing technique to find out
their production cost and profitability. While, Cinto Ltd. must choose ABC costing, in which,
accountant has to allocate overheads on the basis of respective cost driver so that accurate cost
for each segments can be determined. In the end, report declared that 3rd Hair Suite's manager
revenue maximization plan is comparatively more effective because the decisions has been taken
by the mutual consent of all the Stylists.

REFERENCES
Books and Journals
Balakrishnan, R., Labro, E. and Soderstrom, N.S., 2014. Cost structure and sticky costs. Journal
of Management Accounting Research. 26(2). pp.91-116.
DRURY, C. M., 2013. Management and cost accounting. Springer.
Fisher, J. G. and Krumwiede, K., 2015. Product Costing Systems: Finding the Right Approach.
Journal of Corporate Accounting & Finance. 26(4). pp.13-21.
Horngren, C. T. and et.al., 2013. Introduction to management accounting. Pearson Higher Ed.
Jorgensen, B., Patrick, P. H. and Soderstrom, N. S., 2012. Overhead Cost Measurement:
Evidence from Danish Firms’ Switch from Variable to Absorption Costing. AAA.
Kaplan, R. and Anderson, S. R., 2013. Time-driven activity-based costing: a simpler and more
powerful path to higher profits. Harvard business press.
Nawaz, M., 2013. An Insight Into the Two Costing Technique: Absorption Costing and Marginal
Costing. BRAND. Broad Research in Accounting, Negotiation, and Distribution. 4(1).
pp.48-61.
Proctor, R., 2012. Managerial Accounting. Pearson Higher Ed.
Online
Hessong. A., 2013. Calculation of cost driver rates. [Online]. Available through:
<http://www.ehow.com/how_6496667_calculate-cost-driver-rate.html>. [Accessed on
24th August, 2016].