Costing Systems, Variance Analysis, and Budgeting Report

This report comprehensively examines costing systems within an organization, focusing on internal reporting and providing accurate information to management. It explores the relationships between various costing systems, including job order costing, process costing, and contract costing, and identifies different responsibility centers like cost centers, profit centers, and investment centers. The report details characteristics of cost classifications, such as fixed, variable, direct, indirect, and opportunity costs, and highlights the differences between marginal and absorption costing. It analyzes cost information for materials, labor, and expenses, including inventory valuation using FIFO, and explains cost behavior. The report then delves into overhead cost attribution, calculating overhead absorption rates, and addressing over or under-absorbed costs. Furthermore, it covers variance analysis through budgeting, providing information to budget holders and producing management reports. Finally, the report discusses estimating future income and costs for decision-making, considering the effects of changing activity levels, and factors affecting short-term and long-term decision-making processes.

COST AND REVENUES

Table of Contents
INTRODUCTION................................................................................................................................4
TASK 1.................................................................................................................................................4
1.1 purpose of internal reporting and providing accurate information to management..............4
1.2 Relationship between various costing system in the organisation........................................5
1.3 Identifying the responsibility centres ,cost centres , profit centres and investment centres in
organisation.................................................................................................................................5
1.4 Characteristics of different types of cost classification and their use in costing .................6
1.5 Difference between marginal and absorption costing ..........................................................6
TASK 2.................................................................................................................................................7
2.1 Cost information for material, labour and expenses in relation to organisation costing
procedures...................................................................................................................................7
2.2 Analyse the cost information for material, labour and expense............................................7
2.4 Valuation of inventory ..........................................................................................................8
Last in First out ( LIFO).......................................................................................................................9
2.5 Behaviour of the cost..........................................................................................................12
2.6 Record cost information using the costing system .............................................................12
Job costing .........................................................................................................................................12
TASK 3...............................................................................................................................................14
3.1 Attribution of overhead cost of production and service cost centres in accordance with agreed
bases of allocation and apportionment......................................................................................14
3.2 Calculation of Overhead absorption rate.............................................................................14
3.3 Adjustment for over or under recorded absorption cost .....................................................15

3.4 Methods of allocation, apportionment and absorption ......................................................15
3.5 Communicate with staff to resolve queries in overhead cost data......................................16
TASK 4......................................................................................................................................16
4.1 Cost budget to identify variances........................................................................................16
4.2 Analysing the variance........................................................................................................16
4.3 Information for budget holders of any significant variances .............................................16
4.4 Management report in appropriate format.........................................................................17
TASK 5...............................................................................................................................................18
5.1 Estimates of future income and cost for decision – making ..............................................18
5.2 Effect of changing activity level in unit cost......................................................................18
5.3 Calculation of Effecting of changing level of activity .......................................................19
5.4 factors affecting short term and long term decision making ..............................................19
CONCLUSION..................................................................................................................................19
REFERENCES...................................................................................................................................20

INTRODUCTION
Costing refers to the process in which the organisation use the costing system to estimate the
cost of the product. This system assist in allocating the cost to the business operation on the basis of
which the selling price is determined. This study will include the nature and the role of costing
system within an organisation. Moreover, It will contain the information relating to recording of the
cost information. Furthermore, this study will provide understanding of apportion of the cost
according to the organisational requirement. Also, This will provide analysis of deviation from
budget and the use of information gathered form costing system to assist in decision- making.
TASK 1
1.1 purpose of internal reporting and providing accurate information to management
Internal reporting system are the reports which are prepared by management for improving
the performance of the company by analysing the information recorded in the reports. The internal
reporting support the organisation in providing the accurate information which assist management
in making effective decision for the organisation profitability (Bai, Chen and Xu, 2017). This
reporting provides the management with the information relating to the expenses, sales, employee
turnover etc. Management by using this information is able to improve its effectiveness which
support the firm in increasing its effectiveness. Moreover, It provides the management with insight
relating to the various issues which the firm is going through support in making decision which will
resolve the problems (Ghiyasi, 2017). Management requires the internal reporting for analysing
the trend and identifying the profitability. Internal reporting provide the management in identifying
the areas which require development and need to be improve for increasing the performance of
firm.
1.2 Relationship between various costing system in the organisation
There are different costing system that includes job order costing, process costing , contract
costing etc. Job costing system is used in organisation to identity the cost attributable to each job. It
determines the cost incurred for completing the particular job (Jacobson And et.al., 2015). Process
costing is relating to identify the cost of product in it's each process. In this system the output of one
process is the input of the other. Under contract costing the cost of each contract but the period of
the contract is more than one year. There is a close relationship between these costing system as this
assist in determining the cost of the product by using different methods. For example, job costing is
related to the contract costing as they both identify the cost relating to the completion of the job or
contract (Jayarani and Prakash, 2018). The costing system are interdependent as the process costing

is finished then only the job costing is undertaken.
1.3 Identifying the responsibility centres ,cost centres , profit centres and investment centres in
organisation.
Responsibility centres are the part of the organisation for which the management hold the
responsibility. The most common responsibility centres are the departments of the company. When
the manager of the responsibility centre can only control the cost then it is known as cost centre.
The different responsibility centres in the organisation consist of cost centres, revenue centres,
profit centre, investment centre (Malfertheiner and et.al., 2017). If the manager can control both
cost and profit and then the responsibility centre is known as profit centre. Manager of investment
centre is having more authority and responsibility that the cost and profit centres.
The organisational chart shows the sub- task which will be performed by different
departments of the organisation. The cost centres the managers is held responsible for the cost
incurred in that segment and not for revenues. The organisation have production and service
departments which are classified as the cost centres. Also, marketing department, sales department
are the cost centres (Nguyen, 2018). Profit centre is responsible for both cost and revenues. The
profit centre of the organisation includes the marketing manager of product and individual sales
representative. The profit centre include the accounting, auditing etc. there are separate division in
the organisation which are made as profit centre and they focus on earning profit. Investment centre
includes department that is responsible for earning return of investment.
1.4 Characteristics of different types of cost classification and their use in costing
There are various types of cost which are used in costing for determine the cost of the
product in the organisation. There are different cost used in costing which includes the following :
 Fixed cost : It includes the cost which does not change with the change in the output. This
cost is fixed and the organisation have to incur this cost whether it produces output or not. It
includes rent, interest payment, property tax, wages to the labour.
 Variable cost : It changes with the change in output of the product. It includes cost of
material , labour etc.
 Total cost : It is defined as the sum total of the fixed and variable cost (Preuß, Andreff, and
Weitzmann, 2018).
 Direct and indirect cost : Direct cost includes the major components of the production of the
product such as direct labour, direct material. This cost is also refereed to as prime cost.

Indirect cost includes manufacturing overhead such as use of energy.
 Incremental cost : It is the extra cost associated with the manufacturing of one additional
unit of production. It is also known as marginal cost.
 Opportunity cost : It is defined as the cost of alternative which is forgone in order to choose
the other action.
 Sunk cost : This cost is already incurred and cannot be recovered.
1.5 Difference between marginal and absorption costing
Marginal costing Absorption costing
 It is the method in which the variable
cost is considered as the product cost and
fixed cost is considered as cost of period.
 Profit is calculated using profit volume
ratio.
 It determines the cost of next unit.
 It considers both fixed and variable cost
as cost of product.
 Fixed cost is considered as product cost
which reduce the profit margin.
 It determines the cost of each unit.
TASK 2
2.1 Cost information for material, labour and expenses in relation to organisation costing
procedures.
Particular Amount Amount
Opening stock of material 6000
Add: purchase of material 100000
Less : material returned by supplier 2000
Less: closing stock of materials 7000
Raw material consumed 97000
Direct labour (add) 30000
Direct expenses( add) 10000
Prime cost 137000
factory overhead

Factory expenses 15000
Cost of work 152000
Office and administrative overhead
Office and administrative expenses 6000
Cost of production 158000
Selling and distribution expenses 8000
Cost of sales 166000
profit 34000
sales 200000
2.2 Analyse the cost information for material, labour and expense
The cost information relating to material, labour and overhead provided in the above
questions assist in identifying the cost of the product by considering all the expenses which assist in
identifying the profit by comparing the cost of the product with the sales. The material in the above
question includes the purchase of raw material, material returned by the suppliers and closing stock
of the material (Vogelmeier. And et.al., 2017). This cost sheet provide the information relating to
direct labour and direct expenses which are added to the cost of material to determine the prime
cost. After that factory expenses are added to the prime cost which assist in ascertain the work cost.
Then , the administration expenses are added to the work cost to determine cost of production.
After that , the selling and distribution expenses are added to determine the cost of sales and the
sales amount is subtracted from that to identify the profit.
2.3 Various stages of inventory
The different stages of the inventory includes raw material, work-in-n process, finished
goods. Raw material is the first stage of inventory it is the material which will be used to make the
final product. It includes wood, metals, waters etc (Weisbach, Hemel and Nou, 2018.). After the
raw material is in process of creating final product. It enters the next stage which is work – in –
process. Cost associated with the work- in -process includes cost of raw material, labour, overhead
etc. When the manufacturing process is completed then all the cost of production including raw
material and work- in – process are transferred to the finished goods and the final product is sold in
the market.

2.4 Valuation of inventory
FIFO (First in First Out)
FIFO
01/03/19 op. 68 15
05/03/19 purchase 140 15.5
09/03/19 sales 94 19
11/03/19 purchase 40 16
16/03/19 purchase 78 16.5
20/03/19 sales 116 19.5
29/03/19 sales 62 21
Calc
ulatio
n of
cost
of
inven
tory
as on
marc
h 31
using
FIFO
meth
od
date
parti
cular
openi
ng
balan
ce
purc
hase sales
balan
ce

units rate
amou
nt unit rate
amou
nt unit rate
amou
nt unit rate
amou
nt
01/03/19
begin
ning
inven
tory 68 15 1020 68 15 1020
05/03/19
purch
ase 140 15.5 2170 68 15 1020
140 15.5 2170
09/03/19 sales 68 15 1020
26 15.5 403 114 15.5 1767
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
Last in First out ( LIFO)
calcul
ation
of
cost
of
inven
tory
as on
31
marc

h
using
LIFO
meth
od
date
partic
ular
openi
ng
balan
ce
purch
ase sales
balan
ce
units rate
amou
nt unit rate
amou
nt unit rate
amou
nt unit rate
amou
nt
01/03/
19
begin
ning
invent
ory 60 15 900 60 15 900
05/03/
19
purch
ase 140 15.5 2170 60 15 900
140 15.5 2170
14/03/
19 sale 140 15.5 2170
50 15 750 10 15 150
27/03/
19
purch
ase 70 16 1120 10 15 150
70 16 1120
29/03/
19 sale 30 16 480 10 15 150
40 16 640
31/03/
19 10 15 150
40 16 640
Weighted Average

1 Opening 60 15
5 purchase 140 15.5
14 sale 190 19
27 purchase 70 16
29 sale 30 19.5
calcul
ation
of
cost
of
inven
tory
as on
31
marc
h
using
LIFO
meth
od
date
partic
ular
openi
ng
balan
ce
purch
ase sales
balan
ce
units rate
amou
nt unit rate
amou
nt unit rate
amou
nt unit rate
amou
nt
01/03/ begin 60 15 900 60 15 900

19
ning
invent
ory
05/03/
19
purch
ase 140 15.5 2170 200 15.35 3070
14/03/
19 sale 190 15.35
2916.
5 10 15.35 153.5
27/03/
19
purch
ase 70 16 1120 80
15.91
875
1273.
5
29/03/
19 sale 30
15.91
875
477.5
625 50
15.91
875
795.9
375
31/03/
19
closin
g
stock 50
15.91
875
795.9
375
2.5 Behaviour of the cost
Fixed cost : This are those cost which remains fixed with the change in level of output or
sales. For example depreciation by straight line method is the fixed cost, rent, salary etc.
Variable cost : It is the cost which changes with the change in the level of output or sales
(Shepherd, 2015). It increases with the increase in the output of sales and decreases with the
decrease in the level of output.
Semi – variable cost : It has the characteristics of both fixed and variable cost. This cost
fluctuates in volume due to variable component and due to fixed component they do not change in
direct proportion.
Stepped cost: It is constant for the given amount of output and then increase in a fixed
amount at a higher level of output.
2.6 Record cost information using the costing system
Job costing
Job cost sheet
Particular Amount