Cost and Revenue Analysis: Financial Reporting and Accounting

This report provides a comprehensive analysis of cost and revenue, covering key aspects of financial reporting and accounting. It begins with an introduction to cost and revenue, emphasizing the importance of internal reporting for effective management decision-making. The report then explores different costing systems, including job costing and process costing, and their connections. It delves into responsibility centers, cost centers, profit centers, and investment centers within an organization, clarifying their roles and responsibilities. The report also classifies various types of costs, such as direct and indirect costs, variable and fixed costs, and examines the differences between marginal and absorption costing. Furthermore, it analyzes cost information related to material, labor, and other expenses, including the different stages of inventory and inventory valuation methods. The report also addresses overhead costs, including the calculation of absorption rates, adjustments for over or under-recovered overhead, and methods of absorption, allocation, and apportionment. The report concludes with a comparison of actual and budget costs, variance analysis, and a management report, along with an examination of the impact of changing activity levels on unit costs and factors influencing short-term and long-term decision-making.

Cost and Revenues

Table of Contents
INTRODUCTION ..........................................................................................................................1
TASK 1............................................................................................................................................1
1.1 Aim of internal reporting to deliver the exact information to manager................................1
1.2 connection between different costing system.......................................................................1
1.3 Responsibility, cost, profit and investment centre within an organisation...........................2
1.4 Features of various Kind of cost classification. ...................................................................2
1.5 Difference between marginal and absorption costing...........................................................3
TASK 2............................................................................................................................................3
2.1 Cost information of material, labour and other expenses.....................................................3
2.2 Analyse of cost information..................................................................................................4
2.3 different stages of inventory..................................................................................................4
2.4 Valuation of inventory..........................................................................................................4
2.5 Nature of fixed, variable and semi variable cost...................................................................6
2.6 Analysis the cost information by costing method.................................................................7
TASK 3............................................................................................................................................8
3.1 Overhead cost of production and services............................................................................8
3.2 Calculation of various types of absorption rate.....................................................................8
3.3 Adjustments of over or under recovered overhead...............................................................8
3.4 Methods of absorption, allocation and apportionment..........................................................9
3.5 Resolve queries related to overhead cost data ....................................................................10
TASK 4..........................................................................................................................................10
4.1 Compare the actual and budget cost. ..................................................................................10
4.2 Variance for the management report...................................................................................10
4.4 Management report.............................................................................................................10
TASK 5..........................................................................................................................................11
5.1 Presentation of estimated future income and costs for decision making:..........................11
5.2 Examining the effect of changing activity levels on unit costs...........................................11
5.3 Evaluation of both the effect of changing activity levels on unit costs..............................12
5.4 Identifying factors that influences short-term and long term decision making..................12

CONCLUSION..............................................................................................................................12
REFERENCES..............................................................................................................................13

INTRODUCTION
Cost is defined as the amount paid by a buyer to buy a particular product or use a
service. In business, world cost also known as expenses is defined as the total monetary value
that is spent by company in order to produce something (Ahmed and et. al., 2013). Revenue are
defined the amount earn by companies by selling goods and services to customer. In general,
revenues and cost are important part of cost account, so its is significant for company to reduce
cost and increase revenue, which help growth and generating sufficient profit.
In this report, different concept of cost and revenues are discussed like, main purpose of
internal reporting and the important role of costing system. This shows various stages of
inventory management and approaches and connection of costing between. Project report also
discuss the different kind of cost that are incurred by companies during production of good.
TASK 1
1.1 Aim of internal reporting to deliver the exact information to manager.
The concept of internal reporting is the process of collection of accurate financial and
operating information on the regular basis, that help in improving the performance of employees
and operations. Manager prepare internal report and includes various kind of information such
as, sales data, expenses, employees turnover (Internal reporting, 2017). They also makes sure
that these report are not shared with anyone inside or outside the company. The basic purpose of
internal reporting is to have a precious information with top authority, that help them in making
right decision and formulation of strategies. With the help internal reporting process
management can control cost and enhance the revenues during an accounting year. Thus it can be
ascertain that reporting is helpful in determining and relegating project for future.
1.2 Connection between different costing system.
Companies spend a specific amount fro producing goods and services that is known as
cost. In accounting, the different costing system have different important role that are
implemented by management of company at various level such as production of product and
making of services (Bazaraa, Sherali and Shetty, 2013). Some system are, job costing system that
is implemented by every firm weather small or big that help in determining the total cost
incurred on particular individual job. Job costing system help to keep a detail record of different
cost material such as labour,material and other overhead expenses. The costing system is also
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related to process costing system that is also useful in maintaining detail record of cost involved
on material, labour etc. Thus it means that costing system are connected to other system also that
have the same cost component.
1.3 Responsibility, cost, profit and investment centre within an organisation.
Responsibility Centre: It is one of the department within a business firm that help in
management of operation and employees. In large companies management divide the business in
various smaller group and assign task accordingly. This support in smooth functioning and
completing of project on time. Company appoint manager for each group those are libel to
handle and manage operation activity.
Cost centre: The function of cost centre is to manage the total cost incurred on business
activities of companies. The manager of different project are liable to incur required cost on
production and control unnecessary expenses.
Profit centre: The main responsibility of manager is to handle and manage profit centre.
With the help of profit centre they are able to generate income and control expenses spend of
different sub group of companies.
Investment centre: The different division requires equivalent balance of investment.
Thus manager take decision about the total investment of capital required by each unit of
company.
1.4 Features of various Kind of cost classification.
In business there are various kind of cost that are incurred by companies that are
described below:
 Direct labour: The cost that are related to the production process and have a direct effect
on the production level. For instance, cost of labour, material and labour etc.
 Indirect cost: These are cost that do not have a direct effect on the production level.
Indirect cost are also known as common cost or joint cost that are incurred during the
production of product. Such as, expenses related to rent, bill payment of telephone,
electricity etc. and other factory overheads (Burchell and Listokin, 2012).
 Variable cost: These cost are those that are spend in order to produce an additional unit of
input. Variable cost keeps on changing depending upon the activity level of company.
For example, cost of direct labour, commission on sales etc.
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 Fixed cost: These do not change and remain constant throughout the production process.
Some of the fixed are also applicable for companies even if the production process is
completed. For instance, depreciation, rent expenses etc.
1.5 Difference between marginal and absorption costing.
Both types of cost are involved in the production of a goods and services. The basic
difference between them are discussed below:
Marginal costing Absorption costing
This cost is related to the expenses occur on
producing the additional unit of output.
These are all expenses associated with
producing a particular product such as, wages,
utility cost etc.
It includes only variable cost for product
costing and valuation of inventory.
Absorption costing includes all fixed and
variable cost that are send on product costing
and stock valuation.
This method gives higher profitability of all
individual units.
On the other side the profitability of individual
unit is lower.
The process of determining the profit uses the
contribution margin.
The process of measuring profit with
absorption costing includes.
TASK 2
2.1 Cost information of material, labour and other expenses.
The costing system includes all direct cost that are used to calculate gross profit margin at
the first stage. Direct cost includes cost of labour,material and other overheads. The indirect
expenses are calculated to determine the profit for company during a specific period. Some of
these are discussed below:
Direct labour cost: The cost that are incurred on labour during production process such as
wages etc.
Direct material cost: Those cost that are involved on buying specific material that is required to
produce a product or provide a service.
Direct expenses: All other expenses that are spend by company on producing the product.
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2.2 Analyse of cost information.
The cost involved on buying raw material is $11000, direct labour $9000 and other
expenses are $15000. All this record shows company want to low their cost of production,but
company needs to control cost of labour and cost spent of other overheads. This process help in
maintaining suitable profit during by producing and selling more product (Gudeman, 2013).
2.3 different stages of inventory.
The process of making a suitable product from the available raw material involves
different stages. These are describe below:
Raw material: The first stage is related to transferring of raw material into valuable
finished goods. For example, a furniture manufacturing company, at its first stage require woods
that help in making of valuable wooden product.
Work in progress: This stage is related to putting of raw material into production
process, it involves different effective methods and system that are used by companies to convert
raw material.
Finished goods: The last stage is related to the formation of finished good that is fit for
use to customer.
2.4 Valuation of inventory.
FIFO
Receipts Issue Balance
Date quantit
y
unit
cost
amount£ quantity Unit
cost
Amount£ quantity Unit
cost
amount
£
01/0
3/01
68 15 1020 68 15 1020
05/0
3/18
140 15.5 2170 140 15.5 2170
09/0
3/18
68 15 1020
26 15.5 430
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11/0
3/18
40 16 640 114 15.5 1767
40 16 640
16/0
3/18
78 16.5 1287 114 15.5 1767
40 16 640
78 16.5 1287
20/0
3/18
114 15.5 1767 38 16 608
2 16 32 78 16.5 1287
29/0
3/18
38 16 608
31/0
3/18
24 16.5 396 54 16.5 891
Working note-
Units Available for sale =78+140+40+68 =326
Units Sold = 62+ 94+116 = 272
Balance units = 326-272 = 54
Last In First Out (LIFO)
Receipts issued Balance
Date quantit
y
Unit
cost
amount quantit
y
Unit
cost
amount quantit
y
Unit
cost
amount
01/03/1
8
60 15 240 60 15 240
05/03/1 140 15.5 2170 140 15.5 2170
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8
14/03/1
8
140 15.5 2170
50 15 750 10 15 150
27/03/1
8
70 16 1120 10 15 150
70 16 1120
29/03/1
8
30 16 480 10 15 150
31/03/1
8
40 16 640
Weighted average method
Receipts Issues Balance
Date quantity Unit
cost
amount quantity Unit
cost
amount quantity Unit
cost
amount
01/03/1
8
60 15 240 60 15.52 931.2
05/03/1
8
140 15.5 2170 140 15.52 2172.8
14/03/1
8
190 15.52 2948.8
27/03/1
8
70 16 1120 10 15.52 155.2
70 15.52 1086.4
29/03/1
8
30 15.52 465.6 50 15.52 776
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Working note:
Units ready for sales = 70+140+60=270
Units Sold = 30+190 = 220
Units in end = 270- 220 = 50
Average price= Total cost of material/Total number of unit
= 3070/200= 15.35
Average Price= 1120+153.6/80= 15.92
2.5 Nature of fixed, variable and semi variable cost.
There are different kind of cost that are involved while producing valuable goods and
services such as, fixed, variable and stepped cost (Sako, 2012). These are described below:
Fixed cost:
These kind of cost are stable in nature and remain constant throughout the production
process. Fixed cost do not change with the variation in the production unit and do not reduces
also when production is not going in company.
Variable cost:
This type of cost keep vary with changes in production of business. As variable cost
includes the material, labour and other expense of company. The more unit of product more
variable cost will be incurred and vice versa.
Semi variable cost:
This types of cost includes both fixed and variable cost, these are also known as semi
fixed or mixed cost. For a particular level they remain constant after ward they changes into
variable cost.
Stepped cost:
These cost are those expenses that remain constant at a particular level of production. But
keeps on increasing and decreasing once the predetermined level is crossed.
2.6 Analysis the cost information by costing method.
Cost are the amount incurred by businesses in formation of useable product. They
company applies different costing system that has to be recorded that are described below:
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Job system: This system is used by producer to provide an effective job according to the
job required to complete a project. As there are various types of cost that are incurred such as
fixed and variable.
Batch: This is a kind of certain order costing that is similar to job costing. All batch is a
individually classifiable cost unit which is given a collection figure in the same way that each job
is given a amount.
Unit: This is related to the cost incurred on producing a single unit of a specific product.
Unit cost includes all fixed and variable cost that is utilize by management during production
process.
Process costing: This method is related to assigning the cost to product that are produced
by companies at large quantity. Process costing is used to determine the cost of product.
Services: This kind of cost are related to the expense incurred by companies in producing
and delivering valuable services to customer (Schosser and Wittmer, 2015).
TASK 3
3.1 Overhead cost of production and services.
Before producing product it is the responsibility of manager of company to known about
the different types of cost that is going to be incurred on producing good and services. Some of
these are discussed below:
Direct cost: This cost is directly linked with the worth of product. For example, sales ,
marketing expenses etc.
Step down cost: This process is related to distribution of cost with services department.
3.2 Calculation of various types of absorption rate.
Basis of cost Absorption rate of overhead Absorption based overhead
Raw material Factory OH/ Cost of material
150000/110000*100= 136.6%
OH absorption rate*material
cost of job
136.6*240 % =327
Direct labour Factory OH/ Labour cost*100
150000/90000*100 = 166.67%
Labour cost* absorption rate
of OH
200*166.7 % = 333
Prime cost Factory OH/ Prime cost
150000/200000*100 = 75%
Prime cost of job* absorption
rate
240+200*75% = 330
Units of
Production
Factory OH/ Units of output*100
150000/500*100 = 30
Units of output* absorption
rate
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10*30 = 300
Direct labour
basis
Factort OH/ Labour rate*100
150000/30000*100 =5
Labours hours* Absorption
rate of OH
63*5 = 315
Machine hour
basis
Factory OH/machine hours*100
150000/25000*100 =6
Machine hours for job* OH
absorption rate
44*6 = 264
3.3 Adjustments of over or under recovered overhead.
(a)
Estimated annual overhead (OH) 124320
Number of machines 28
4440
No of weeks worked per year 48
92.5
Normal working week less
Maintanace 37
OH rate per machine hour 2.5
(b)
Estimated direct wages
rate(per hour) 1.5
Machine hours produced 4200
Estimated wages 6300
Actual wages 7400
Over-absorption 1100
Estimated OH rate 2.5
Machine hours produced 4200
Estimated OH 10500
OH incurred 10200
Under absorption 300
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3.4 Methods of absorption, allocation and apportionment
Implementing of agreed changes to method
There are different method of allocation of factory expenses that are explained below:
 Direct Labour: This refer to the prime expenses that are directly related to production and
these direct expense are used to ascertain gross profit margin.
 Machine time: These expenses are related to amount spend by companies in maintenance
of machinery that increase the efficiency of machine.
Apportionment: This is related to allocation of cost that is involvement in the
production of goods. Some of these are discussed below:
 Direct Allocation: This method is related to charging of cost of services that are produced
by companies. It is used to operating division with those to determine the expense. For
example direct labour and machine hours.
Absorption: This costing techniques is used to determine the cost of product to
determine the profit that could be generated from different business activity.
 Production unit method: This method is related to determine the expenses with the
absorption rate to the number of unit produced during an accounting year.
 Percentage of direct material cost:With the help of this method company determined
the overhead that are fully or partially used in production process (Sen and et. al., 2012).
3.5 Resolve queries related to overhead cost data
In companies overheads are consider to the normal expenses that are used to run daily
business operations. If these expenses are higher company would not earn sufficient profit.
Therefore it is important for company to minimise the cost of production. Some of the quires are
as follows:
Ascertain the reason of increasing the overhead during production. By introducing which
process and method the level of expenses can be lowered. Does communication with project staff
help in reduces the excess use of resources. If the cost of production are higher the profit margin
will be lowed.
TASK 4
4.1 Compare the actual and budget cost.
Difference
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Basis Actual cost Budgeted cost
Definition It is actual expenditure which
is connected with the
manufacture of goods
The standard cost are also
known as budgeted cost
that is estimated to be
incurred on producing good
and services.
Nature Actual cost may change as per
alteration in the volume of
production and it is flexible in
nature.
Budgeted cost does not
alteration as per changes in
production of product.
4.2 Variance for the management report
In companies when manager produces the internal report they includes different variance
in their report for example, material overheads, cost variances, Price etc. If there are not recorded
properly their may be a chance of mismanagement in company. It is observed that in there is
mismanagement among various department variance might be create. Variance can be due to
overvaluation and undervaluation of amount (Soni, 2013).
4.4 Management report.
These report are prepared by the manager of companies that involves the detail
information of different process, project or stock available in company. With the help of detail
internal report manager are able to determine the revenues and expenses for an accounting year.
Some of the following steps required for making reports are:
 Prediction of budgets and analyse them with real performance.
 Develop customs field and filters in the accounting system.
TASK 5
5.1 Presentation of estimated future income and costs for decision making:
Relevant cost: It is refer to as incremental cost which is used to determine the objective
cost of a business decision and it deviates as per economic condition of an organization.
Break even analysis: It refer to the level which helps in representing the sales amount
either in quantity or in sales term which is required to cover up the total cost incurred. Profit
level at break even point is always zero.
Margin of safety: It is defined as a state which help in examining the difference between
break even sales and the actual sales that has taken place.
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Target profit: It can be defined as a decision or a calculation which helps in identifying
the expected amount of profit the company manager expect to achieve within the period of time
specified.
Profit volume analysis: It is defined as an analysis which which is used to determine the
changes that is taking place in the cost and volume of an company operating income as well as
on net income (Sufian and Kamarudin, 2015).
Limiting factors: Which indirectly affect the growth of the business concern are fers to
as limiting factors like low rainfall will limit colonization.
Payback: It is defined as the length of time required to cover the cost which is invested.
Discounted cash flow: It is defined as an techniques which is probably used by the
manager of the company so as to estimate the value of an investment on the basis of future cash
flow.
5.2 Examining the effect of changing activity levels on unit costs.
The important element which are used to ascertain manufacturing expenses in the
organization are fixed cost and total unit cost. Moreover some unit of fixed cost pertain to level
of unit cost. Thus, it can be said that it helps the business concern in determining per unit cost.
Due to variation in specific unit of product and variable cost, profitability ratio changes.
5.3 Evaluation of both the effect of changing activity levels on unit costs.
The activity levels of production have huge effect on the business organisation as these
are discussed below:
Profitability Level:
The profit of organisation is depend upon the production of products. As the more
production and more sells leads to generate extra revenues (Tacconi, 2012).
Employment:
As if there will be more production in business then it will require more employees so
company needs to appoint more employees. And in case of less production organisation might do
retrenchment.
Sustainability:
If company is producing and meeting customer requirement then organisation can sustain
for long term.
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5.4 Identifying factors that influences short-term and long term decision making.
In businesses, there are respective elements that determinant the long and short term
decisions. This help maintaining profitability, productivity of company during a [particular
product, some of these are as follows:
 profit of the enterprise.
 Skilled of the management.
 Desired goals of company.
 Debt equity ratios of the company (Xu, and Li, 2013).
CONCLUSION
From the above report it has been concluded that he costs and revenues are the important
factors for companies and are interdependent to each other. It is observed that if companies
reduce the expense than they are able to maintain and generate huge profit. Companies uses
different techniques of costing that help in adding value to the product. There are different
method used by companies in order to maintain the proper record of inventory such as FIFO and
LIFO. This help in increasing the productivity, performance and profitability of company.
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