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

Direct material 100000
Direct labour 50000
Fixed overhead 180000
Total production cost 330000
Selling and administrations expenses 30000
Total cost 360000
Selling price 400000
Job profit 40000
 Batch costing
Particular Quantity Units Amount
Material
Stores 2000 10 20000
Special 500 5 2500
Labour
Dept. A 90 10 900
Dept. B 50 11 550
Overheads 100 4 400
Total for the batch 24350
 Unit costing : It is calculated by dividing the total cost with total units produced. For
example, Total variable cost of xyz company is £45000 and total fixed cost is £20000 which
it incurred while producing 5000 units. The cost per unit is calculated as follows
total fixed cost + total variable cost / total units
20000+45000/5000 = £13 cost per unit
 Process costing :
Particular kg £

Input transferred from process 1 100 10000
Labour 5000
Material 7000
Total cost 22000
Cost per kg 22000/100 220 per kg
 Service costing : Services provided by the bus, total milometer run by the bus is 600.
Particular Total Cost per kg
Standard charges
License fees 3000
Insurance charges 1000
Road tax 1000
Garage rent 2000
Driver's salary 3000
Attendant salary 2000
Total (A) 12000 20
Running charges
Repair and maintenance 1000
Cost of fuel 500
Lubrication grease and fuel 600
depreciation 750
Total ( B) 2850 4.75
TASK 3
3.1 Attribution of overhead cost of production and service cost centres in accordance with agreed
bases of allocation and apportionment
Overhead cost of production is related to the expenses of the production of the product. It

includes the rent, property tax , salary etc. there are two methods of allocating overhead cost first
is direct methods and other is step down method. Direct method allocates the each service
department's total cost directly to the production department (Yang and Chen, 2018). Step down
method allocates the cost of some service departments to other service department. In service cost
centre the step down methods allocate the service cost to the operating and other service
department in a sequential process.
3.2 Calculation of Overhead absorption rate
Machine hour method
Particular Amount ( $)
Estimated factory overhead 150000
Estimated raw material 110000
Estimated direct labour cost 90000
Estimated machine hours (hours) 25000
Estimated direct labour hours(hours) 30000
Overhead absorption rate (per machine hours) 6
Actual machine hours 44
Total absorbed overhead ($) 264
Labour hour method
Estimated factory overhead 150000
Estimated direct labour hours(hours) 30000
Actual labour hours (hours) 63
Overhead absorption rate ( per labour hour) 5
Total absorbed overhead($) 315
3.3 Adjustment for over or under recorded absorption cost

Particular Amount Amount
Normal workings hours per annum
Number of machines* hours per week 28*42*48 56448
(-) Loss of hours due to maintenance 28*5*48 6720
49728
Machine hour rate 124320/49728 2.5
Wages and overhead over absorbed amount
Overhead
Overhead absorption 4200 *2.5 10500
(-) Overhead incurred 10200
Over absorption 300
Wages
Wages absorption (28*42*4)* 15 7056
Actually incurred 7400
Under absorption 344
3.4 Methods of allocation, apportionment and absorption
There are various methods which are considered for allocation of the cost it consists of
direct method, step down method and the reciprocal method. The direct method is used in allocating
the cost of production directly to the product. The step down method allocates the cost of operating
department to other department (Allocation of Service Department Costs, 2018). Reciprocal method
allocates the service department cost to operating and other department. Absorption method of cost
includes direct material cost method, production unit method, Direct labour cost method, prime cost
method, labour hour rate method, machine hour rate method. Apportionment includes step method,
direct redistribution method, equation method.
3.5 Communicate with staff to resolve queries in overhead cost data.
Organisation in order to communicate with staff to resolve the overhead cost data query
must include the employees in identifying the various information relating to the expenses which is
allocated for producing the product. Moreover, The employees must be involved in decision –
making process to control the overhead cost for reducing the expense of the cost of product.
Communicating with staff member assist in providing the firm with various suggestion and ideas to
resolve the queries regarding the overhead cost data.

TASK 4
4.1 Cost budget to identify variances
4.2 Analysing the variance
The cost budget shows the variances by comparing the actual cot with the budgeted to
identify the variance. It assists in determining the variance which helps the management in reducing
the variances by taking effective measures (Variance Analysis, 2017). Variance analysis is important
for planning for direct and indirect manufacturing cost and sales revenue and sales cost. Variance
analysis assist in reducing the cost of the process by implementing the strategies which helps in
reducing the cost and increasing the revenue.
4.3 Information for budget holders of any significant variances
The budget holders are the individuals to which the information relating to the budget
prepared by the organisation is held. It provides them information relating to the various areas of
the firm which are inefficient and need to the improved for improving the performance of the firm
in the industry. The budget holder must have information that the all the financial transaction of the
business comply with financial rules and regulation. It must manage the budget in proper way in
order to get the accurate result.
4.4 Management report in appropriate format.
The management report consist of financial reports and other reports such as sales, cash etc.
Financial report assist in providing the information relating to the profitability of the business and
the financial position of the company. It consists of two reports that includes profit and loss and
balance sheet. The profit and loss statement assist in providing the information relating to incomes

and expenses on the basis of which the profitability of the firm is measured. Balance sheet includes
the assets and liabilities of the firm which helps in determining the financial position of the
company.
Profit and loss statement
Balance sheet

TASK 5
5.1 Estimates of future income and cost for decision – making
The organisation make estimates for the future income and cost which helps the firm in
determining the future performance and profitability of the business. The organisation on the basis
of this future incomes and cost is able to make decision for improving the future performance and
profitability (Tsai And et.al., 201). The management is able to make effective decision for
increasing the incomes by reducing the cost. Relevant cost is the avoidable cost that are incurred
when making business decision. Break- even analysis assist in identifying the point at which the
firm will have no profit and no loss. Margin of safety provide the different between the actual sales
and break even sales. Profit – volume analysis assist in measure the profit with the volume. Payback
period assist in identifying the period in which the company will get the cost of the investment.
5.2 Effect of changing activity level in unit cost
The unit cost is obtained by dividing the total cost with the units produced. The fixed cost

in this the total cost changes with the change in the level of activity. The total fixed cost remains
same but the fixed cost per unit decreases with the increase in production. But the variable cost
remains the same which the change in activity level.
5.3 Calculation of Effecting of changing level of activity
Particular Activity at 3000 volume Activity at 4000 volume
Rent 3000 3000
Salary 3000 3000
Total fixed cost 6000 6000
Fixed cost per unit 6000/3000= 2 per unit 6000/4000 = 1.5
5.4 factors affecting short term and long term decision making
There are various factors which affects the decision making which consist of experiences,
biasses , differences in the thought of the individual, attitude about risk and uncertainty, time
constraints, external factors such as political changes, economic changes , social and cultural factors
, technological factors etc (Dale and Plunkett, 2017). This factors affect the business decision
making due to which many a time the organisation is not able to make effective decision for
improving the performance of the firm.
CONCLUSION
From the above study it has concluded that various costing system that consist of job costing
, process costing, unit costing etc. Moreover, it has provided understanding of the different types of
cost that consisted of fixed cost, variable cost, opportunity cost, marginal cost etc. furthermore, It
has provided with valuation of inventory with the use of FIFO and LIFO method. This assignment
has also included the management report such as profit and loss statement, balance sheet etc. for
measuring the profitability and financial postilion of the firm.

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Online
Allocation of Service Department Costs. 2018. [Online]. Available through
:<https://courses.lumenlearning.com/tcc-managacct/chapter/allocation-of-service-
department-costs/>
Variance Analysis. 2017. [Online]. Available through:
<https://economictimes.indiatimes.com/definition/variance-analysis>