Cost and Revenue Analysis: A Comprehensive Financial Report

This assignment solution provides a comprehensive overview of cost and revenue analysis within a financial accounting context. It delves into internal reporting, exploring the purposes and relationships between various costing systems such as direct, absorption, and standard costing. The document examines different responsibility centers (cost, profit, and investment centers) and classifies various costing systems based on their applications, including standard, marginal, process, and budgeted costing. A key aspect is the comparison of marginal and absorption costing methods. The solution then details the recording and analysis of cost information related to materials, labor, and expenses, including the various stages of inventory and calculations using FIFO, LIFO, and weighted average methods. It also addresses cost behavior, costing systems, attribution of overhead costs, and the calculation of overhead absorption rates. Furthermore, the assignment covers variance analysis, the preparation of management reports, and the estimation of future incomes and costs for decision-making processes. It explains the impact of changing activity levels on unit costs and discusses factors influencing short-term and long-term decisions.

Costs and revenues

Table of Contents
TASK 1............................................................................................................................................4
1.1 purpose of internal reporting.................................................................................................4
1.2 relationship between various costing systems.......................................................................4
1.3 explanation of various responsibility centers in organisation...............................................4
1.4 classifications and use of different types of costing system.................................................5
1.5 difference between marginal and absorption costing............................................................5
TASK 2............................................................................................................................................6
2.1 recording of cost information relating to material, labour and expenses in accordance with
the procedures of costing............................................................................................................6
2.2 analysis of cost information related to material, labour and expenses..................................6
2.3 Various stages of inventory...................................................................................................7
2.4 Calculation of cost of inventory using LIFO, FIFO and weighted average method.............7
2.5 behavior of various costs in the organisation........................................................................9
2.6 recording of cost information using various costing systems...............................................9
TASK 3..........................................................................................................................................11
3.1 attribution of overhead costs for production and service cost centres................................11
3.2 calculation of overhead absorption rate..............................................................................11
3.3 adjustment of under and over recovered costs....................................................................12
3.4 methods of allocation, apportionment and absorption of costs and implementation of
changes in these methods..........................................................................................................12
3.5 resolving queries of overhead cost data..............................................................................13
TASK 4..........................................................................................................................................13
4.1 comparison of budgeted cost with actual costs...................................................................13
4.2 analysis of variance.............................................................................................................14
4.3 information regarding variance along with suggested actions for remedies.......................14
4.4 preparation of management report .....................................................................................15
TASK 5..........................................................................................................................................16
5.1 Estimation of future incomes and costs for the decision making process...........................16
5.2 explanation of effect of changing the activity levels on unit cost.......................................17

5.3 Calculation of effect of changing activity level on unit cost..............................................17
5.4 various factors having effect over short term and long term decision-making process......17
REFERENCES..............................................................................................................................18

TASK 1
1.1 purpose of internal reporting
Internal reporting is a tool of management which is used to inform the managers and
other internal users regarding internal affairs of the business (Maskell, Baggaley and Grasso,
2016). It helps the management in taking decisions regarding enhancement of internal efficiency
of the business activities like productions, inventory handling, etc.
Purpose of internal reporting:
 It helps in communicating internal rule of the company with its members.
 It helps the management in preventing business from frauds in the organisation.
 It is also used in order to reduce the risk of happeining of errors in the business activities.
1.2 relationship between various costing systems
Direct costing, Absorption costing, marginal costing, standard costing, etc. are various
types of costing system. All the systems helps management in their decision making system. All
the costing systems are interrelated with each other (Prahlad, 2015). In absorption costing,
accountant absorbs all the cost determined by direct costing system into various departments of
the costing.
Whereas in standard costing cost absorbed among various departments are compared
with the cost calculated in budgeted costing system in order to determine cost efficiency of each
level of department in the company. Hence, all the costing systems are interrelated with each
other.
1.3 explanation of various responsibility centres in organisation
Responsibilities centres helps in managing various business activities by allocating
various types of responsibilities to different departments. Company can have different
responsibility centres like cost centre. Profit centre, etc.
cost centre
This centre concerns with management of cost in the business. Its main objective is to
have better control of cost in the business activities by minimising cost wastage.

Profit centre
It helps management in enhancing profit of overall company. It makes different strategies
as to earn maximum amount of profit from normal course of business (Giannouli, 2015).
Investment centre
This centre advices the firm to invest its excess money in such a way so that it can earn
maximum interest in the return. It provides the best use of cash in the business and enhances the
liquidity in entity.
1.4 classifications and use of different types of costing system
Standard costing, marginal costing, process costing, budgeted costing, etc. are various
types of the costing system (Top 6 Types of Costing Systems | Cost Accounting, 2018). They all
are classified on the basis of their use in the business. Standard costing helps in determining
overall efficiency in terms of variance, process costing helps in determining cost incurred by
production department at each level of production process and with the help of budgeted costing,
management predicts the cost to be incurred by the business in future to ensure the sources of
funds availability in the company.
1.5 difference between marginal and absorption costing
Basis Marginal costing Absorption costing
Classifications It classifies costs as fixed costs
and variable cost
In this method cost is
classified as production,
distribution, selling costs, etc.
Purpose To ascertain the total cost To apportion total costs at
different levels.
Profitability It provides higher amount of
profit
Due to inclusion of fixed costs,
it gives lower profit
(Difference Between Marginal
Costing and Absorption
Costing, 2018).

TASK 2
2.1 recording of cost information relating to material, labour and expenses in accordance with the
procedures of costing
Cost sheet
Particular Amount Amount
Opening stock 50000
Add: purchase during year 7000
Less: closing stock 46000
Inventory consumed 11000
Add: direct labour 8000
Prime cost 19000
Add: factory overhead
Factory rent 8000
Carriage inward 1000
Supervision expenses 6000
Add: opening wip 4000
Less: closing wip 2000
Work cost 36000
Add: administrative overheads 6000
Cost of production 55000
Add: selling and distribution
overheads 6000
Total cost 61000
Add: profit 9000
Selling price 70000
2.2 analysis of cost information related to material, labour and expenses
For the purpose of taking cost informations, cost sheet need not be understand properly. It
includes direct expenses including direct material and wagers, which helps in determining prime
cost. When all the factory expenses is added in prime cost like, factory rent, factory electricity

charges, etc., along with adjusting opening and closing work in progress, it sums ups as work
cost of production.
For the purpose of calculating total cost of production, all the administrative overheads
are being added in the work cost (Hakkennes, Arblaster and Lim, 2017). It shows the total sum
incurred by the business in the production activity. It can be used by the managers for analysing
and approprating various cost incurred by the business in the production purpose.
After adding all the selling and distribution overheads including advertisement expenses,
distribution expenses etc., total cost incurred by the business in producing any product and
making it available to the customers for final consumption. Managers add profit margin in total
cost for determining selling price of the product.
2.3 Various stages of inventory
In a manufacturing concern, inventory can be classified in various stages like, raw
material, work in progress, finished goods, etc. these are the stages from which company
converts its raw material into a finished product.
Raw material
It is the basic stage of inventory, at this, inventory is being kept in natural form for its
further processing.
Work in progress
It is the middle stage of production in which the material is neither in natural form nor
has been produced properly or converted into finished goods.
Finished products
It is the final stage of inventory at which inventory is ready to be sold in the market. For
reaching at this stage, material has faced all the production process. Finished goods are those
which have bee passed all the production and inspection processes of the production unit.
In this way, all the inventories passes through various processes for converting into
finished goods to be sold in the final market for the consumption purpose.
2.4 Calculation of cost of inventory using LIFO, FIFO and weighted average method
Calculation of cost of inventory as on march 31 using FIFO method
date particular Opening balance purchase sales balance
units rate amount unit rate amount unit rate amount unit rate amount

01/03/19
beginning
inventory 68 15 1020 68 15 1020
05/03/19 purchase 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
24 16.5 396
31/03/19
closing
stock 54 16.5 891
calculation of cost of inventory as on 31 march using LIFO method
date particular opening balance purchase sales balance
units rate amount unit rate amount unit rate amount unit rate amount
01/03/19
beginning
inventory 60 15 900 60 15 900
05/03/19 purchase 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 purchase 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
Closing
inventory 10 15 150
40 16 640
calculation of cost of inventory as on 31 march using Weighted average method
date particular opening balance purchase sales balance
units rate amount unit rate amount unit rate amount unit rate amount
01/03/19
beginning
inventory 60 15 900 60 15 900
05/03/19 purchase 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 purchase 70 16 1120 80
15.918
75 1273.5
29/03/19 sale 30
15.918
75
477.562
5 50
15.918
75 795.9375
31/03/19
closing
stock 50
15.918
75 795.9375
2.5 behaviour of various costs in the organisation
On the basis of behaviour, costs can be categorised into numerous categorise like fixed
cost, variable cost, semi variable cost, etc.
Fixed cost
Fixed costs are those which remains fixed over the time. It does not changes with the
change in level of production. Although, talking about per unit cost, it keeps changing.
Variable costs
As the name these costs varies over the time (Christian, 2018). However, these costs
remains constant per unit for each level of production.
Semi variable cost

Semi variable costs are the combination of fixed and variable costs. A part of thses costs
remains constant over the time period, on the other hand, another part of these costs keeps
changing with the change in production level, as they remain same on per unit basis.
2.6 recording of cost information using various costing systems
Batch costing
Batch costing helps in allocating total cost of production for different batches. With this
method, management can identify cost incurred on production of each batches.
Calculation of cost for each batch Batch no. 4101
particular Department Qunatity Rate amount
Material Store department 5000 10 50000
Wages Sales department. 2000 5 10000
Purchase department 1000 4 4000
overheads 200 5 1000
Total cost
for the batch
65000
Job costing
Job costing refers to that method of costing which helps in allocating total cost on the
basis of different jobs of the department (Edwards, Sobel and Bonilha, 2018). This m,ethod is
useful for those organisations which manufacture products as per the demand of the customer or
which produces customized products.
Job costing for job no.654
Particular Department Quantity Per unit costs Amount
Direct
material
Inventory
department
50 50 2500
Direct labour Production 20 100 2000
Purchase
department
20 50 1000

Overheads 2000
Total cost of
job
7500
Unit cost
This method is used to determine cost incurred on each unit. Majorly this method is used
by the managers in determine selling price of each unit of the product. It can be determined by
either absorption costing method or variable costing method.
Calculation of cost of each unit
Particular Amount
Absorption costing Variable costing
Raw material 50 50
Wages 20 20
Factory overheads 40 40
Fixed factory overheads 20 0
Total cost of each unit 130 110
Process costing
Process costing is used by those manufacturing concerns which produces products in
through various processes. With the help of this process, business can determine cost incurred on
each process of production.
Process costing of process 5
Particular Qty. Amount Particulate Qty. Amount
Transfer from
process 4
1000 10000 Finished
product
1000 15000
Labour 2000
Labelling 1000

Packing 2000
1000 15000 1000 15000
Service costing
Service costing method is used to bifurcate the cost among various services departments
of the company along with total operating cost incurred by the company.
Particulars Amount
Service department 1 Service department 2
Total cost
TASK 3
3.1 attribution of overhead costs for production and service cost centres
Overhead costs are incurred by the business for the purpose of turning raw material into
finished goods. These costs do not incure directly to the product. In this they need to be allocate
to the various departments of organisation so that management could identify the actual amount
incurred by company on each department.
In general there are two major departments of any business i.e. production department
and service department. Firm allocates its total overhead incurred into these departments with the
help of allocation of cost methods like direct cost method, step down method or reciprocal
method. Company choose any one method which suits best to its business in order to determine
overhead incurred by each department for having better cost control.
3.2 calculation of overhead absorption rate
Machine hour method
Particular Amount ( $)
Budgeted factory overhead 150000
Budgeted raw material 110000

Budgeted direct labour cost 90000
Budgeted machine hours (hours) 25000
Budgeted direct labour hours(hours) 30000
Overhead absorption rate (per machine hours) 6
Actual machine hours 44
Total absorbed overhead ($) 264
Labour hour method
Budgeted factory overhead 150000
Budgeted direct labour hours 30000
Actual labour hours 63
Overhead absorption rate ( per labour hour) 5
Total absorbed overhead($) 315
3.3 adjustment of under and over recovered costs
Particular Amount
Number of machine hours 56448 hrs.
Normal loss in the working hours 6720
Effective working hrs. 49728
Machine hour rates (124320/49728) 2.5
Overhead absorbed 10500
Overhead incurred 10200
Over absorption 300

Wages absorbed 7056
Wages incurred 7400
Under absorption 344
3.4 methods of allocation, apportionment and absorption of costs and implementation of changes
in these methods
There are 3 methods of allocation of costs i.e. direct method, step method and reciprocal
method. Physical unit methods, average unit cost methods, survey methods, etc. are some
methods if appropriation of costs. Whereas, absorption can be done on the bases of direct labour,
direct material, prime costs, etc.
With the help of methods of allocation of cost, an organisation can allocate its total costs
incurred in all the departments. It helps managers in determining actual cost incurred by each
department in order to determine their own efficiency.
Methods of absorption of costs helps in absorbing total cost of the production on various
bases. These helps in charging overheads over different cost units with the help of different rates/
it helps in calculating costs for each cost centre of the business (Collier, 2015).
Methods of appropriation are helpful for the management in order to allocate total joint
cots of the products in various levels. It provides information regarding cost incurred on different
level of production in order to determine the best level at which production will provide
maximum cost efficiency to the company.
3.5 resolving queries of overhead cost data
Overhead costing helps managers in their decision making process. It provides a way to
allocate various costs of the overall business in oprder to determine actual cost incured by each
department.
It is the major factors helping the managers in their cost controlling task. With the help of
it they can allocate cost tro each department and determine the cost wastage which helps them in
elimination of unnecessary cost.

Through it, managers also can detect the per unit cost of the product through which they
can determine the selling price of each product by adding set profit in it.
TASK 4
4.1 comparison of budgeted cost with actual costs
Particular Amount
Budgeted cost Actual cost Variance
Material 2000 1500 500
Labour 1500 1800 -300
Salaries of employees 10000 12000 -2000
Plant and machinery 15000 10000 5000
Total cost 28500 25300 3200
4.2 analysis of variance
Variance occurred when actual cost differs from the budgeted costs. Budgeted costs are
estimated cost by the managers while taking into account all the historical costs incurred by
business in past years and the efficiency of the business concern. In case the budgeted cost is
lower than the actual cost incurred, it shows the inefficiency of the company. On the other hand,
if total cost incurred by the firm is less than the budgeted cots, in means company's efficiency
has been increased over time.
As per the above example company has incurred less than the budgeted cost in case of
purchase
4.3 information regarding variance along with suggested actions for remedies
As per the above estimation and calculation of variance, in could be seen that in case of
material, budgeted cost is more than actual cost, in this order management's efficiency regarding
procurement of material has been increased (Gylling, 2015). On the other hand, its efficiency
regarding labour control and salaries of employees has been reduced, they are providing negative
variance. It can be because of increase in cost of labour or increase in requirement of number of
labours in business.

Suggestions
After analysing the variance report, it could be suggested that, management need to
improve its labour efficiency in the business. In this regard, they can held training program for
them in order to improve their skills and knowledge and become multi talented. It would help
management in reducing n umber of labour requirement in the business and enhance the
efficiency of firm as well.
Efficiency of the firm relating to expenses of plan and machinery has been increase as it
has a positive variance. Talking about overall efficiency of business, it has been enhanced by the
management,

4.4 preparation of management report

Illustration 1: management report
source : Property Management Systems Procurement Report, (2019)

TASK 5
5.1 Estimation of future incomes and costs for the decision making process
Relevant cost
Relevant cost helps the business in eliminating wastage of cost in the firm. It helps
management in detecting unnecessary costs incurred by the firm in order to reduces the overall
cost of the company.
Break even analysis
It is the analysis of the point of sale at which company will neither earn profit nor bear
any loss. In this analysis firm finds no profit no loss point of sale of firm in order to determine
minimum amount of sale to be made by company (de Souza, 2017).
Margin of safety
Margin of safety is minimum value of stock that need to be maintain by the inventory
department in order to reduce the risk of shortage of inventory the company for the production
purpose.
target profit
target profit can be defined as a set volume of profit that need to be gained by the
company in order to fulfil its organisational goals and objectives.
profit volume analysis
This analysis shows the amount of profit that could be earned by firm at different levels
(Profit Volume Analysis (Explained With Diagram), 2017). In this analysis, management may
form a graph which shows the amount of profit at different level of sales made by the company.
Limiting factors
Limiting factors are those factors which makes the business in producing limited products
in a specific period. It could be population of the region, environmental factors, etc.
Payback
it is the time which is required to recover the amount invested by the business for the
purpose of earning profit from the investment.
Discounted cash flow
It is the method used by the management in order to determine the value of investment
required to earn in future from the investment. In addition, this method also shows the present
value of investment required for this purpose.

5.2 explanation of effect of changing the activity levels on unit cost
In case, if fixed cost in the business changes, in would definitly result in change in
activity level on unit cost. Variable cost remains same at per unit basis. In this regard, it does not
affect the activity level on unit cost (Said, 2016).
On the other hand, fixed costs like, rent, salaries, etc. are some fixed cost of the business
which remains constant over year but keeps changing on per unit basis. Therefore, change in
fixed cost amount results in change in the activity level on unit cost.
5.3 Calculation of effect of changing activity level on unit cost
Calculation of per unit cost for 1000 units
Particular Total cost Per unit cost
Total variable cost 10000 10
Total fixed cost 6000 6
Total cost 16000 16
Increased fixed cost 8000 8
Variable cost 10000 10
Total cost 18000 18
Change in per unit cost 2
5.4 various factors having effect over short term and long term decision-making process
Various factors like change in environment, change in taste of the population,
enhancement of education level over time, seasonal changes, etc. (Cooper, 2017). have major
influence over the decision making of the business.
Managers need to keep change their decisions and strategies in order to make their
business activities flexible to grab frequent changes and sustain in the competitive market
effectively in maintain its profitability and the market share as well.