City & Islington College - Financial Budgeting Task 2: Cost Analysis

This assignment addresses key aspects of financial budgeting and analysis, focusing on cost behavior and its implications. It begins by defining and contrasting four common cost types: variable, fixed, mixed, and step-variable, providing examples, advantages, and disadvantages for each. The analysis then explores how changes in costs directly affect the budget preparation process, emphasizing the dynamic relationship between cost fluctuations and budget figures. Finally, the assignment explains the circumstances under which marginal costing is used by management, illustrating its application with relevant examples to highlight its practical utility in decision-making, especially when dealing with multiple product lines. The work references relevant sources to support the arguments and analysis of the topics presented.

Task 2: Compare and contrast possible
changes in cost: AC1.3, AC 2.4
Question 1 - From the cost behaviour standpoint, explain the four
common cost types: variable, fixed, mixed, and step-variable.
Definition, examples, advantages/disadvantages
Variable cost: This is a cost which changes over the period of time in the same
proportion with change in sales level.
For example: Direct material, direct labour etc.
Advantage:
 Unaffected by inventory change.
 The profit under this reflects real figure.
Disadvantage:
 It does not follow generally accepted accounting principle.
 It shows lower level of net income.
Fixed cost: This is a cost which remain constant in all level of sales.
For example; depreciation
Advantage:
 It is easy to record and audit.
 As it does not change with change in sales that’s why it brings stability in
business.
Disadvantage:
 This result into reduced profit because this assumption does not fit in reality.
Mixed cost: This is a cost in which both fixed and variable cost is included which
need to be separated (Bösch and et.al., 2018).
For example: Telephone expenses
Advantage:
 It helps in building the proper budgeting and costing system.
 It can be changeable as per business environment.
Disadvantage:

 It is quite complex and time consuming.
Step-variable cost: This cost is changes as per the change in level of activity and
involve large amount of changes.
For example: Transport cost
Advantage:
 Here, the net operating income is utmost same to the cash flows.
Disadvantage:
 It does not assign the fixed cost of production to the cost of units of products.
Question 2 - How changes in costs affect the process of preparing
budgets.
Whenever, the cost changes the budgets figure also get changes because budgets
depend upon the estimated value rather than actual. The effect of which can be
positive and negative.
Question 3 – Explain circumstances when marginal costing would be
used by management, provide examples where necessary
The marginal costing is used by the management when the company deal in more than
one product. The different product line helps the company to know which is profitable
and which is not via use of marginal costing (Sarkar and et.al., 2021).
References
Book and Journals
Bösch, P. M. and et.al., 2018. Cost-based analysis of autonomous mobility
services. Transport Policy. 64. pp.76-91.
Sarkar, B. and et.al., 2021. Combined effects of carbon emission and production quality
improvement for fixed lifetime products in a sustainable supply chain
management. International Journal of Production Economics. 231. p.107867.