Detailed Analysis of Costs and Revenues for Decision Making

This report provides a comprehensive analysis of cost and revenue management within an organization. It begins by outlining the purpose of internal reporting and the relationships between different costing systems, including marginal, absorption, standard, and historical costing. The report then delves into responsibility centers, cost classifications, and the differences between marginal and absorption costing. Task 2 focuses on recording and analyzing cost information for materials, labor, and expenses, alongside inventory valuation methods (FIFO, LIFO, and weighted average) and cost behavior (fixed, variable, semi-variable). Overhead cost allocation, absorption rates, and variance adjustments are discussed in Task 3. Task 4 examines the comparison of budgeted and actual costs, variance analysis for management reports, and the formulation of management reports. Finally, Task 5 explores estimates of future income and costs, the effect of changing activity levels on unit costs, and factors affecting short-term and long-term decision-making. The report concludes with an overview of the key concepts and findings, emphasizing their importance in financial management.

Costs and Revenues

Table of Contents
INTRODUCTION ..........................................................................................................................1
TASK 1............................................................................................................................................1
1.1 Purpose of internal reporting and providing accurate information to management:............1
1.2 Relationship between various costing systems within an organisation:...............................1
1.3 Responsibility centres, cost centres, profit centres and investment centres within an
organisation:................................................................................................................................2
1.4 Characteristics of different types of cost classifications and their use in costing:................2
1.5 Differences between marginal and absorption costing:........................................................3
TASK 2............................................................................................................................................4
2.1 Record of cost information for material, labour and expenses:............................................4
2.2 Analysis of cost information for material, labour and expenses:..........................................4
2.3 Various stages of Inventory:.................................................................................................5
2.4 Valuation of inventories:.......................................................................................................5
2.5 behaviour of these costs:.......................................................................................................7
2.6 Record of cost information using different costing systems:................................................7
TASK 3............................................................................................................................................8
3.1 Attribution of overhead cost to production and service cost centres:...................................8
3.2 Calculation of overhead absorption rate:..............................................................................8
3.3 adjustment for under and over recovered overhead cost:......................................................9
Overhead rate per machine hours: -............................................................................................9
Over and under absorption: -.......................................................................................................9
3.4 Methods of allocation, apportionment and absorption at regular intervals:........................10
3.5 Communication with staff to resolve queries related to overhead cost data.......................10
TASK 4..........................................................................................................................................10
4.1 Comparison of budgeted and actual costs noting any variances.........................................10
4.2 Analysis of variances for management reports...................................................................11
4.3 Information for budget holders of any significant variances:.............................................11
4.4 Formulation of management reports in an appropriate format...........................................12
TASK 5..........................................................................................................................................12

5.1 Estimates of future income and costs for decision making................................................12
5.2 Effect of changing activity levels on unit costs..................................................................13
5.3 The effect of changing activity levels on unit costs............................................................13
5.4 Factors affecting short-term and long-term decision making.............................................14
CONCLUSION .............................................................................................................................14
Books and journals....................................................................................................................15

INTRODUCTION
Cost and revenues can be termed as a total cost of manufacturing and delivering a
product. In simple words, cost can be said as what is spent where revenue as what is earned. It is
found in the annual accounting statement of a company. Cost and revenues include expenses like
wages, administration cost, marketing and advertising costs, etc. In this report the discussion is
all about nature and role of costing system within an organisation, recording and analysing cost
information. Also, apportion costs according to organisational requirements, analysing deviations
from budget and reporting these to management and use of collected information from costing
system to assist decision-making (Burchell and Listokin, 2012).
TASK 1
1.1 Purpose of internal reporting and providing accurate information to management:
Internal management reporting system is the part of management control system which
provides necessary business information and financial outcomes. The main purpose of internal
reporting is to improve decision making ability with responsiveness to subjective issue. It also
helps to find out the problems in an organisation with there best alternative solutions (Terpstra
and Verbeeten, 2014).
1.2 Relationship between various costing systems within an organisation:
There are different types of costing systems which can be implemented by an
organisation according to the nature of entity which are as follows:
 Marginal costing: It is a costing technique wherein the marginal cost, i.e. variable
cost is charged to unit of cost, while fixed cost for the period is completely written
off against the contribution.
 Absorption costing: Absorption Costing is a method of costing a product in which
all fixed cost and variable cost are calculated to cost centre where they are
accounted for using absorption rates.
 Standard costing: It is the method of costing, where certain standard rates are set
to compare with actual cost for determining causes of variance so corrective
measures can be taken for enhancement.
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 Historical costing: In this method of costing, determination of cost are obtained
from actual cost only once it is incurred. As a result, every organisation adopts
this method of costing for better result (Graham, 2013).
In context of B&M, the company uses the absorption costing and historical costing where
they observe previous cost for analyses and absorption costing for net profit after including all
expenses related to fixed and variable cost, where they have a relation which shows how to
increase organisation's profit.
1.3 Responsibility centres, cost centres, profit centres and investment centres within an
organisation:
 Responsibility Centre: It is an organisational unit directed by manager, who have
supreme authority for managing activities. In responsibility centre, all information
related to revenues and cost are collected. In terms of B&M, manager have the
responsibility to manage issue relating revenues and cost.
 Cost centres: It is the department within a organisation to determine cost but
which do not add direct profit. Some of the departments of cost centre are R&D
department, Marketing department, etc. In context of B&M, different department
have been made who is responsible for all works related to cost centre and any
issue regarding various department of cost centre (da Cruz, Simões and Marques,
2012).
 Profit centres: This centres are included in the part of business to make
appreciable contribution in the organisation's profit. The manager of profit centre
are held accountable for asset and liability.
 Investment centres: It is the department in which the responsibility to control
revenues and associated costs, assets and liabilities. The performance of
investment centre is judged on return on investment (ROI) incurred.
1.4 Characteristics of different types of cost classifications and their use in costing:
The different characteristics of cost classifications and their use in costing are as under:
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 Nature of Expenses: In terms of expenses cost can be classified into labour and
material. In this type of cost B & M have categorised their expenses according to
different classes of labour (Raisman, 2013).
 Relation to Cost object: The classification is done on the basis of direct cost and
indirect cost. In context of B & M, they have defined duties to their employee's
how they will calculate all the expenses related to direct and indirect cost.
 Function/ Activities: In this cost have been categorised into group, such as
production, administration, finance, etc.
 The behaviour of Costs: The behaviour of cost changes in accordance with change
in input volume. The different types of behaviour cost are fixed cost, variable
cost, and semi- variable cost.
 The purpose of decision-making by management: For selecting best decision for
maximum out with extra profit cost can be classified as opportunity cost, marginal
cost, sunk cost, etc. and many more.
1.5 Differences between marginal and absorption costing:
There are certain differences between marginal costing and absorption costing which are
as follows:
Marginal Costing Absorption Costing
It is a technique that assumes only variable
cost as product cost.
It is the technique that assumes both fixed
cost and variable cost as product cost.
Profit is calculated by using Profit Volume
Ratio.
In absorption costing fixed cost are included
in product cost so profit gets reduced.
It determines the cost of next unit. It determines the cost of each unit.
It is presented by outlining the total
contribution.
It is presented for the purpose of financial and
tax reporting.
It divides overheads into two categories:
Fixed overhead
Variable overhead
It divides overheads in three categories:
Production
Administration
Selling & Distribution
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In context of B & M, they uses Absorption costing to find accurate result as it includes
all fixed and variable cost to its cost centre so accurate net profit can be obtained.
TASK 2
2.1 Record of cost information for material, labour and expenses:
Costing procedure implemented in any organisation defines as an activity of recording
costs in appropriate accounts so that actual cost can be calculated for manufacturing process as
an individual basis and for whole manufacturing process. In any organisation, there are various
kind of costs that are incurred due to business operations (Gensler, Leeflang and Skier, 2012).
These are material, labour and expenses.
Material cost:
It includes cost of raw materials that are purchased by the organisation from the market to
produce output. Material cost vary according to the output level but it remains same per unit of
output.
Labour Cost:
Labours are the workers of an entity that is engaged in producing the output and entity
gives wages to them. These wages are called labour cost, this cost is same per unit of output but
it changes if output level increases as a whole.
Expenses:
There are two types of expenses which is direct expenses and indirect expenses, direct
expenses incurred directly on a particular product. On the other hand, indirect expenses are
incurred on as a whole for the organisation (Kirkham, 2014).
2.2 Analysis of cost information for material, labour and expenses:
After recording the various kind of cost such as material labour and direct expenses and
so on, the next step is to analysis these costs, which are as follows:
Material cost:
In analysis part of material cost, company shall analysis the current material cost with
previously incurred cost in same period of time. By doing so, an entity can evaluate its current
performances and will take corrective action for any variances results form comparison between
actual and previously incurred material cost (Tallon, 2013).
Labour cost:
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By setting the budget for current period, an entity can asses its current labour cost with
budget. It helps the company to assess the efficiency and effectiveness of the labours and
accordingly take corrective action (Cassell, Dreher and Myers, 2013).
Expenses:
It includes the evaluation of current period cost with standard so that company can
identify the weak areas where it has to work to improve them and accordingly increase the
profitability of company.
2.3 Various stages of Inventory:
Inventory is the very important for an organisation, which need to be take care from
various threats to save the company from losses. There is requirement of valuation of inventories
in an entity to show the correct balance of the inventories in the financial statements. There are
mainly three types (stages) of inventory in an manufacturing organisation which are as follows:
 Raw Material: It is the first stage of inventory and it is purchased from outside the
organisation from the market. There is need to take care its inventory because this shall
be used in the manufacturing process to make final product.
 Work in Progress: When a raw material is processed by the organisation but it is not yet
completed, then in such situation inventory is neither raw material nor it is a final product
because it is in process not completed. This inventory is called as work in progress
because process which is stared on this in not yet completed that's why it is called as
work in progress (Oum and Yu, 2012).
 Finished Goods:
This is the last stage in which a raw material is finally converted into the product of
company which company wants to sale to its target customer. This is a new product which is
completely different from its original shape and nature.
2.4 Valuation of inventories:
There are various methods to calculate the value of closing inventory of an organisation,
out of three methods of valuation are as follows:
Using FIFO method:
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Date Purchase Sales Balance
Units Unit cost Total Units Unit cost Total Units Unit cost Total
01/03/19 - - - - - - 68 15 1020
05/03/19 140 15.5 2170 - - - 68 15 1020
- - - - - - 140 15.5 2170
09/03/19 - - - 68 15 1020 114 15.5 1767
- - - 26 15.5 403 - - -
11/03/19 40 16 640 - - - 114 15.5 1767
- - - - - - 40 16 640
16/03/19 78 16.5 1287 - - - 114 15.5 1767
- - - - - - 40 16 640
- - - - - - 78 16.5 1287
20/03/19 - - - 114 15.5 1767 38 16 608
- - - 2 16 32 78 16.5 1287
29/03/19 - - - 38 16 608 54 16.5 891
- - - 24 16.5 396 - - -
Using LIFO method:
Using Weighted Average Method:
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2.5 behaviour of these costs:
There are various cost which is completely different from each other in nature which are
as follows:
Fixed cost:
It is a cost which remains same in every situation whether level of output increases,
decreases or remain same. It is a cost which is either incurred in past time or which is to be
incurred in future but obligation for this cost is determined in past time (Gillen and Mantin,
2014).
Variable cost:
It is a cost which is continuously changes at a uniform rate when there level of outputs
increases or decreases. But variable cost is remained same at per unit if output of an entity.
Semi-variable cost:
It is a cost which is remained same for particular boundaries of output but it changes if
particular range of output changes at a uniform rate. Semi-variable cost remains same for
particular range of output.
Stepped Cost:
It is a fixed cost with some certain boundaries when the limit is crossed then it will get
changed. It is an additional investment which is required to increase the production.
2.6 Record of cost information using different costing systems:
There various costing systems available for an organisation and it may choose any one of
them as per nature of its business operations, which are as follows:
Job:
In job costing method, cost is recognised as per each and every job assignment. Managers
may get detailed information of expenses that have taken place for each job that are performed
by the individual worker.
Batch:
This method is used to take homogeneous products as cost unit for organisation. In this
costing technique a batch includes a particular number of items or articles. For example: if a
company which produces soaps for the target customers then it may use batch costing for
calculation of cost of its products.
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Unit:
In this system cost that has taken place for manufacturing a specific unit of product is
recorded. All fixed and variable expenses related to one item is considered in this method.
Process:
Costs related to production process is recorded in this method. It is mainly used in those
companies which manufactures products in large quantities.
Service:
In this costing technique expenses related to each service rendered by a company is
recorded. It is mainly used in hospitality industry, transport industry and schools ,universities and
so on.
TASK 3
3.1 Attribution of overhead cost to production and service cost centres:
There are two main types of attribution of overhead costs. Both of them are described
below:
Direct:
It is the most popular method of cost attribution. Main purpose of this technique top allot
costs to all production departments that are related to service division.
Step Down:
In this method only some specific costs are considered such as those expenses that are
incurred by human resource and maintenance department of the organisation. It is responsible to
provide rank to service divisions according to their performance.
3.2 Calculation of overhead absorption rate:
The calculation these are as under:
Machine Hours : -
Overhead absorption rate = Estimated Factory Overheads / Estimated machine hours * 100
= $150000 / 25000 * 100
= 600 % of direct material
Absorption of overheads based on direct material = Overhead absorption rate * actual material
cost of job
600% * $ 240 = $1440
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Labour Hours : -
Overhead absorption rate = Estimated Factory Overheads / Estimated labour hours * 100
= $150000 / 30000 * 100
= 500 % of direct labour cost
Absorption of overheads based on direct labour cost = Overhead absorption rate * actual labour
cost of job
= $ 200 * 500% = $ 1000
3.3 adjustment for under and over recovered overhead cost:
Calculation for showing under and over recovered overhead cost are as under:
Overhead rate per machine hours: -
Normal working hours = No of machines * No of working hour per week * No of work per week
= 28 * 42 * 48
= 56448 hours
Loss of hours on maintenance = No of machines * No of hour loss on maintenance per week
*No. of work per week
= 28*5*48
= 6720 hours
Annual effective working hours = Normal working hours - Loss of hours on maintenance
= 56448 - 6720
= 49728 hours
Machine hours = Estimated annual overhead / Estimated working hours
= 124320 / 49728
= £2.5 per hours.
Over and under absorption: -
Over absorption = Machine hours produce – Overhead incurred
= (4200*2.5) – £10200
= £10500-£10200
= £300
Under absorption = Wages absorption – Wages incurred
= (28*42*4 @ £1.50) - £7400
= £7056 – £7400
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