Analysis of Costs and Revenues: Financial Reporting and Costing

This report provides a comprehensive analysis of costs and revenues, covering various aspects of financial reporting and costing systems. The report begins by exploring the purpose of internal reporting and the relationships between different costing systems, including marginal and absorption costing. It delves into the responsibility centers within an organization, such as cost centers, profit centers, and investment centers. The report then examines different cost classifications and their uses in costing. Further, it covers recording cost information for labor, material, and expenses and analyzing this information according to organizational costing procedures. It examines the various stages of inventory, inventory valuation methods (LIFO, FIFO, and weighted average), and the behavior of different cost types. The report also discusses the recording of cost information using various costing systems (job, batch, unit, process, and service costing). It then moves on to overhead costs, including their allocation and apportionment, calculation of overhead absorption rates, and adjustments for under or over-recovered overhead costs. The report also includes variance analysis, budget comparisons, and providing information for budget holders. Finally, it explores the estimation of future incomes and costs for decision-making, the effect of changing activity levels on unit costs, and factors affecting short-term and long-term decision-making.

Costs and revenues

Table of Contents
Task 1...............................................................................................................................................1
1.1-The purpose of internal reporting and providing accurate information to management......1
1.2- The relationship between the various costing system within an organisation.....................1
1.3 The responsibility centres, cost centres, profit centres and investment centres within an
organisation.................................................................................................................................1
1.4 The characteristics of different types of cost classifications and their use in costing...........2
1.5-The difference between marginal and absorption costing....................................................2
Task 2...............................................................................................................................................3
2.1 Recording cost information for labour, material and expenses.............................................3
2.2 Analyse cost information for material, labour and expenses according to organisation's
costing procedure........................................................................................................................3
2.3 The various stages of inventory............................................................................................4
2.4 Inventory valuation using different methods........................................................................4
2.5 Behaviour of these costs :.....................................................................................................8
2.6- Record cost information using job, batch, unit, process and service costing system..........8
Task 3...............................................................................................................................................9
3.1 Attribute overhead costs to production and service cost in according allocation and
apportionment.............................................................................................................................9
3.2 calculate overhead absorption rates in according machine hours and labour hours...........10
3.3- Make adjustments for under or over recovered overhead costs in accordance established
procedure...................................................................................................................................11
3.4 Methods of allocation, apportionment and absorption at regular intervals, implementing
agreed changes to method.........................................................................................................11
3.5 Communicate with relevant staff to resolve any query in overhead cost data....................12
Task 4.............................................................................................................................................12
4.1- Compare budget cost with actual cost, noting any variance..............................................12
4.2- Analyse variances for management report.........................................................................12
4.3-Provide information for budget holders of any significant variances, making valid
suggestions for remedial action.................................................................................................13

4.4-Prepare management report in an appropriate format, presenting these within the required
time scales.................................................................................................................................13
Task 5.............................................................................................................................................14
5.1 Estimate of future incomes and costs for decision making................................................14
5.2 The effect of changing activity levels on unit cost.............................................................15
5.3 Calculate the effect of changing activity levels on unit cost..............................................15
5.4- Factors affecting short-term and long-term decision making............................................15

Task 1
1.1-The purpose of internal reporting and providing accurate information to management
Internal reporting is financial data and other information to investors and creditors for knowing
the position of the important operating units of a company. Internal report involves financial and
operational information on a frequent basis which is distributes to manager and those who can
use it to improve performance. This information includes expenses trends, failure rates and
employee turnover which gives the accurate information to management for knowing the exact
position of company in market. The main purpose of maintaining this report is to measure the
ability to generate revenue and profit. It gives the accurate information to management which
enable them in judging the effectiveness of their responsibility for taking the corrective measure.
The aim and purpose of maintaining internal report is to examine cash flow, business
performance and the financial health of the business.
1.2- The relationship between the various costing system within an organisation
Every organisation design costing system to monitor the costs which are incurred by a business.
There are four types of costing such as marginal costing by which only the variable cost are
allocated, absorption costing to absorb the fixed and variable cost to production, standard costing
is the ideal cost to find the actual cost in the accounting records and historical costing which
refer the original cost of an asset. For measuring the cost and accumulate the information there
are mainly two types of costing system that are- 1.Job costing system 2-Process costing system
Job costing and process costing system have the same goal such as determines the cost of
product. They both have the same cash flows.
1.3 The responsibility centres, cost centres, profit centres and investment centres within an
organisation
Responsibility centre : Responsibility centre is a part of the organisation where manager
responsible for the decision-making, activities and the result. All information related to the cost
and revenues are collected and reported through responsibility centres.
Cost centres : cost centre manager handled over all cost incurred but they do not
responsible for revenues. They ensure that no more difference between budget and actual cost.
Cost centre manager and their subordinates are responsible for the control production cost.
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Profit centre : Profit centre is responsible for the cost and revenue. Profit centre manager
concern about to increased revenue by increasing production. Profit centre beneficial for
competitive environment to success by managing cost and earn higher revenue.
Investment centre : it is responsible for investment and profit. Manager has control the
revenues and invested in assets. Manager has responsibility to buy and sell the assets.
1.4 The characteristics of different types of cost classifications and their use in costing.
There are two types of cost- fixed cost and variable cost.
Characteristics
Fixed cost does not fluctuate with the production units. For example insurance, rent, depreciation
are included in fixed cost. Per unit fixed cost increased if volume of output is decreased.
Variable cost increase and decease, according to the production units. It has charged with the
production cost. Departmental head control the incurrence and consumption.
Use in costing
Fixed cost can not be avoided by the organisation therefore company includes their fixed
expenses in product cost. For example company paid the insurance. It is fixed expenses so, it is
enhanced the product cost.
Variable cost includes direct material and direct labour cost. It always fluctuating therefore cost
are increased when variable cost rises.
1.5-The difference between marginal and absorption costing
Marginal costing Absorption costing
Variable production cost is known as marginal
cost.
The total cost of production is known
absorption costing.
Variable cost is considered as product cost and
fixed cost is considered as period cost.
Both fixed and variable cost is considered as
product cost.
Inventory is valued at the variable production
cost only.
Inventory is valued at the full production cost
like fixed and variable.
Non-production overheads are deducted before Non-production overhead are deducted after

contribution. gross profit.

Sales- variable costs = contribution Sales- cost of sales = gross profit
Task 2
2.1 Recording cost information for labour, material and expenses
2.2 Analyse cost information for material, labour and expenses according to organisation's
costing procedure
Firstly we need to find the prime cost and for calculating the prime cost we add opening
stock of raw material, purchased raw material and the expenses related to purchase. After adding
the purchasing expenses we add manufacturing expenses like electricity bill, repairs and
maintainance etc. For finding the prime cost we deduct closing stock of raw material.
Prime cost is the basis of calculating cost of production. For getting the cost of
production we add opening WIP(work in progress) along with administrative expenses such as
office expenses, telegraph etc. For finding out the cost of goods sold we deduct closing stock of
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WIP. For calculating cost of sales we add opening stock of finished goods and subtract closing
stock of finished goods. Selling expenses are added up for finding the total cost and then
manager add desired profit margin for determining the selling price of produced product.
2.3 The various stages of inventory.
There are four stages of inventory defined.
Raw material : It is the first stage of inventory. Raw material are the basic substance which is
used in manufacturing the final products. In this stage company get the stock from the vendor
according to their production.
Work-in-progress : After take the raw material, company start to make their products. Process
of Product making is called work in progress. It is the process between raw material and finished
the products. WIP includes labour cost, overhead cost etc.
Finished goods : After the manufacturing process, product will ready for the sale. In this stage
all cost are included in the production cost. According to market demand company make their
product and send in the market.
Coat of good sold : Cost of good sold includes all direct expenses and excludes all indirect cost.
After sale the product, inventory shows in the income statement under the COGS account.
2.4 Inventory valuation using different methods
LIFO method: This method considers that new inventory is sold first as compared to those
which were purchased or manufactured earlier.
Total purchased unit- 60+140+70= 270 units
Goods sold during the period- 190+30= 220 units
Closing inventory- 270-220 = 50 units
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Closing inventory- 50 unit @ = £750
FIFO method : The method considers materials that are purchased or produced first are sold
first. The calculation is given below:
Total produced unit- 68+140+40+78 = 326 units
Goods sold during the period- 94+116+62= 272 units
Closing inventory- 326 - 272 = 54 units
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Closing inventory- 54 units at the price of £16.50 = £891
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Weighted average method: This is calculated by total cots of inventory divided by total number
of units in inventory.
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2.5 Behaviour of these costs :
Fixed cost : Fixed cost is unaffected in the production unit. Depreciation is an example
of fixed cost. It does not matter that machine produce 100 units or 1000 units, depreciation
charges will be based on number of years.
Variable cost : Direct material and labour is a variable cost. Its affected to the production
unit. For example company needs new machine, which result depreciation, labour hours and cost
increased therefore product cost also enhanced.
Semi variable : It is partly fixed or partly variable cost. For example labour cost is fixed
but their overtime charge is variable cost. They fluctuate with volume because of variable
component and they do not change because of fixed component.
Stepped cost : stepped cost are fixed for a short time then they jump to a new fixed cost.
Sometimes, incurring the extra amount of Step cost can decrease the profit.
2.6- Record cost information using job, batch, unit, process and service costing system
In accounting there are some method of costing that every organisation use for recording
information such as-
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Job order costing- In this method each job has to be planned and its cost determined
separately on the basis of actual cost.
Batch costing- In batch costing each batch of similar component is taken together and
treated as a job.
Unit costing- This costing is known as output costing. Under this method total cost
incurred is divided by total production to determine the cost per unit.
Service costing- This costing are applicable in those companies where services rendered.
Costs are determined on the basis of operating expenses and charges are made.
Process costing- It is a method of assigning costs to units of production in those
companies who are producing large amount of homogeneous products.
The main purpose of these costings is to generate higher profitability by deciding that where to
cut costs.
Task 3
3.1 Attribute overhead costs to production and service cost in according allocation and
apportionment
Except direct labour, direct material and direct expenses all the costs on the income are called
overhead cost. This expences include advertising, insurance, rent, repair etc.
Direct overhead cost
Step down method cost- The step allocation method is an approach which is used to
allocate the cost of the service which is provided by one service department to another
servicedepartment.
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The company uses employee hours as the base for allocating the cost of department A and space
occupied for allocating the cost of department B.
3.2 calculate overhead absorption rates in according machine hours and labour hours
Labour hour basis- This method is more appropriate and suitable in a labour intensive
cost centre. Direct labour cost method is only based on time factor and it is not changed by
factors like varying wage rate, overtime payment.
Overhead absorption rate = Estimate factory overhead/Estimated labour hours * 100
= $150000/30000 hours *100
= $5 per labour hour
Machine hour basis- This method is appropriate in a capital intensive cost centre. In this
method production overheads are related to the machinery like power, repair etc.
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Overhead absorption rate = Estimate factory overhead/Estimated machine hours * 100
= $150000/25000 hours *100
= $6 per machine hour
3.3- Make adjustments for under or over recovered overhead costs in accordance established
procedure
3.4 Methods of allocation, apportionment and absorption at regular intervals, implementing
agreed changes to method
The allocation method is a technique for charging the cost of products and services department to
other parts of a business. There are generally three types of method for allocating service
department costs are direct method, step method and reciprocal method. By the direct method
managers allocates costs of each of the service departments to each operating department. This is
bassed on the department's share of the allocation base. Under Step- ladder method of
apportionment, expenses of one service department are allocated to all other departments in the
proportion of benefit derived by them. The same process is done with the other service
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department till expenses of all department are dealt with. For calculating absorption, overhead
absorption rate is calculates by dividing the overhead cost by number of units produced.
3.5 Communicate with relevant staff to resolve any query in overhead cost data
There are some problems which every organisation face in overhead cost data like- Effective
budgeting and forecasting over a timeline, accurate method for calculating progress, managing
and controlling project changes and inefficient system and process. For solving these problems'
manager can held the meeting for communicate with relevant staff. For this it can establish
project controls standards around time-phasing budget. They can establish processes where they
are measuring progress and forecasting on regular basis. It can draw up a series of questions to
ask potential vendors when considering a new software solution. They can reduce operating cost
by embracing technology, use telecommunication to cut down on costs and cancels unused
services.
Task 4
4.1- Compare budget cost with actual cost, noting any variance
Budget variance is the difference between the budget amount of expenses and revenue and the
actual amount. The main difference between actual cost and budget cost is that actual cost refers
to the cost paid or incurred whereas budget cost is an estimated cost of a product considering the
material, labour and overhead cost.
At the beginning of the period budget cost are prepared with estimated for revenues and costs
and the actual result and costs are recorded throughout the period. At the end of the period actual
costs is compared with the budget cost or estimated cost and the difference and variance in cost
are called budget variance. The budget variance is favourable when the actual revenue is higher
than the budget cost or the actual expenses are less than the budget.
4.2- Analyse variances for management report
A variance analysis is the investigation of the difference between the actual cost and the planned,
budget and standard cost. The main purpose of using this investigation is to maintain control
over a business. This analyse help to management in determining the variance between cost
estimates and actual cost and with the help of this report a manager can improve their estimation
power and productivity accordingly for the upcoming years. For making this report managers
should require rate cycle date, the dates on which the report is based the second is estimated cost
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amount and the final is the actual cost which they can enter at the end of the year. On the basis of
this management can calculate the variance and profit and loss.
4.3-Provide information for budget holders of any significant variances, making valid
suggestions for remedial action
A budget holder is a member of a staff who has been assigned a budget for a particular activity
and who is accountable to their senior manager for it.
Actual Budget Variance
Sales 1,805,000 1,800,000 +5000 (favourable)
Variable cost of goods cost 867,400 800,000 -67,400(unfavourable)
variable selling expences 250,000 240,000 - 10,000(unfavourable)
Contribution margin 687,600 760,000 -72,400(unfavourable)
Fixed cost of goods sold 575,000 580,000 +5,000(favourable)
Fixed selling expenses 117,000 120,000 +3,000(favourable)
Net profit +4,400 60,000 -64,000(unfavourable)
For getting the favourable variance or profit manager should changes in condition and the quality
of management like special care to reduces costs can result in favourable variance, on the other
hand carelessnes of management can lead unfavourable variance or loss.
4.4-Prepare management report in an appropriate format, presenting these within the required
time scales
Reporting to management is a process of providing information to various levels of management
which make it enables in judging the effectiveness of their responsibility and taking corrective
measure. The main aim of management report is to inform managers of different aspect of the
business.
For preparing the management report manager need to create financial report such as profit and
loss statement and balance sheet. After making financial report they need to make sales and
marketing report which shows strength, weakness and opportunities relative to different
products. All the other information about company operations need to involve in management
report because it helps to management team to see that where work is flowing and the necessity
of improvement.
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Task 5
5.1 Estimate of future incomes and costs for decision making
Relevant cost assists finance manager in estimating the future profit and identifying
variance in expected revenue and actual revenue.
Break even analyses helps business in determining sales, volume, production and
identifying the actual point on which business may start earning profit. Management compare
fixed and variable cost with sales volume for determine the actual progress.
Margin of safety determines sales volume which is above the breakeven point.
For example if company has sold product worth of 2500000 and its break even sale is 1500000
then the difference in both these figures is 1000000 which is called as margin of safety. That
helps management in making correct decision where margin of safety can be increased.
Target profit aids in estimating the difference between actual profit and expected
revenue. Profit volume analyses
Profit- volume analyses
For example
Unit sold 5000
Selling price 2per unit
Variable cost 1.50 per unit
Fixed cost 2000
Solution:
Sales revenues at 2 per unit= 4000*2=8000
Less: variable cost =6000 (at 1.50 per unit)
Contribution= 2000
Fixed cost= 2000
Profit/Loss NIL
Limiting factors are such constrains that impact on production. These are shortage of
labour, material etc. This impacts on overall sales and minimised profit in income statement.
Payback period helps the firm in increasing its future income by investing in the right
project. By this way company would be able to take correct decision of selecting that project
which return is high.
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Discounted cash flow helps in imposing correct discount by considering cost of
capital for calculating present value of assets. This impacts on future cash flows and affect
overall cost and income of business.
5.2 The effect of changing activity levels on unit cost
Unit level activity occur when any type of product is made and service is performed. The costs of
direct labour, direct materials are examples of unit level activities.
If there is a changes in the supplier expenses of the product then it will direct affect on unit cost.
If supplier expenses increases from the estimated amount then it will decrese the unit cost and
hence manager will get a good profit. The cost of direct material is incresed then it will increse
the unit cost by that organisation will have to bear loss. The changes in the machineary
maintainance will be directly affect on unit cost in positively and negitively which depends on
the estimate cost. If estimate cost is more than the actual cost then there will be profit whereas if
estimate cost is less then there will be loss.
5.3 Calculate the effect of changing activity levels on unit cost
If the level of activity increases within the relevant range variable cost per unit and fixed cost.
Total cost will increase because variable costs increse as production increases. also increses like
variable cost is per unit is $50,000 and the level of activity like direct labour increses by 5000
with relevant range, releavant range is $10,000, Difference =5000 then variable cost will also
increse by 5000.
Variable cost = 50000
releavant amount of direct labour = 10000
level of activity =15000
then cost will be 50000+15000=65000.
5.4- Factors affecting short-term and long-term decision making
There are several factors that affect decision making like experience, size of the company, the
asset structure of the business and the expectation of investors etc. Some qualitative factors are
as follows-
Taxation policy- Taxation is the most important factor that influence business decision.
For example finance manager have numerous method of charging depreciation and they have to
decide which method should be appropriate that may reduce tax burden according government
tax policy.
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