Report on Costs, Revenues, and Costing Systems at Marks and Spencer

This report provides a comprehensive analysis of costs and revenues within Marks and Spencer (M&S), a major British retailer. It begins by exploring the nature of costing systems, their role, and their significance within the organization, including internal reporting and different costing methods like historical, absorption, direct, and marginal costing. The report then evaluates cost information, including recording, analysis, and the different stages of inventory valuation using FIFO method. Furthermore, it examines cost apportionment, overhead costs, and calculation methods. The report also delves into budget deviations, variance analysis, and the presentation of information for budget holders. Finally, it assesses the application of costing systems in decision-making, including estimating future income and the impact of changing activity levels on unit costs, offering valuable insights into the financial operations of M&S.

COSTS AND REVENUES

Table of Contents
INTRODUCTION...........................................................................................................................1
1. The nature of costing system and its role within Marks and Spencer.........................................1
1.1 Internal reporting and its purpose.....................................................................................1
1.2 Different costing systems and their relationships ............................................................1
1.3 Identification of responsibility, profit, investment and cost centres................................2
1.4 Classifications of cost and their uses................................................................................2
1.5 Marginal and absorption costing differences ..................................................................3
2. Cost information examination and recording .............................................................................3
2.1 Recording information......................................................................................................3
2.2 Analysis the cost information...........................................................................................4
2.3 Different stages in inventory ...........................................................................................4
2.4 Value inventory method...................................................................................................5
2.5 Cost behaviours................................................................................................................7
2.6 Costing systems and cost information..............................................................................8
3. Apportion cost..............................................................................................................................8
3.1 Describing overhead cost of production and service cost centre.....................................8
3.2 Calculating overhead absorption rates using methods....................................................8
3.3 Adjustments for overhead cost.......................................................................................10
3.4 Reviewing method of allocation, apportionments and absorption.................................10
3.5 Communicate when the queries in overhead..................................................................10
4. Deviation from the budget.........................................................................................................10
4.1 budget cost and actual cost and variances......................................................................11
4.2 analyse the variance .......................................................................................................11
4.3 Presenting the information for budget holder.................................................................11
4.4 management report.........................................................................................................11
5. Costing systems and decision-making.......................................................................................12

5.1 Preparing the estimates of future income.......................................................................12
5.2 The impact of changing activity levels on unit costs.....................................................13
5.3 Calculate the effect of changing activity level...............................................................13
5.4 Impacts on short-term and long-term decision making..................................................14
CONCLUSION..............................................................................................................................14
REFERENCES..............................................................................................................................15

INTRODUCTION
The below mentioned report identifies the significance of Costs and Revenues in context
of Marks and Spencer. Marks and Spencer is a major British multinational retailer specialising in
selling of luxury food products, home products and clothes. The report develops an
understanding of the nature of costing within the context of the chosen organisation. Also, it
understands their role and what significance they play within the organisational environment of
Marks and Spencer. The report briefly analyses and evaluates cost information. In the report, the
costs of apportion are explored as well. The proper usage of information gathered from costing
system in order provide an assistance in decision making for the organisation is briefly
evaluated. These evaluations will help in the determination the importance of revenue and cost
within Marks and Spencer.
1. The nature of costing system and its role within Marks and Spencer
1.1 Internal reporting and its purpose
Marks and Spencer is required to regularly compile the organisation's financial and
operational information in order to improve the value and performance of the organisation. The
process of internal reporting allows Marks and Spencer to compile this information and
distribute it to its stakeholders in order to make the necessary changes and improve the
organisation's performance (Capocchi, 2019). The report includes useful information such as
sales data, failure rates, expense trends etc. and are not meant to shared by the organisation to
any 3rd party.
Along with it, the generation of the accurate information helps Marks and Spencer to
make necessary assumptions and improve its performance. Accurate information will also help
the organisation to reach its required goals and objectives properly.
1.2 Different costing systems and their relationships
Historical Costing: The process of historical costing allows the costs to be established
after they are incurred. Marks and Spencer uses this costing system to analyse the actual incurred
costs.
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Absorption Costing: Marks and Spencer uses this system of costing to comprehend the
fixed manufacturing overheads. Such overheads are allocated by the organisation to its products
and are later used in its stock valuation.
Direct Costing: In the method of direct costing, the products of Marks and Spencer are
charged with the costs types that vary from the volume.
Marginal Costing: Marginal costing allows Marks and Spencer to classify its costs into
fixed and variable cost. Along with it, this costing is used for internal reporting.
The relationship between historical costing and absorption costing is that to understand
the manufacturing overheads in absorption costing it is important for the organisation to analyse
incurred costs which are done with the help of historical costing method. Also, it is important for
Marks and Spencer develop direct costing to develop marginal costing in order to complete the
process of internal reporting.
1.3 Identification of responsibility, profit, investment and cost centres
Below explored are types of centres such as responsibility, profit, investment and cost:
Responsibility centre: These centres are the organisational subunits in Marks and
Spencer. Small business divisions or groups are the kinds of subunits which are set up as
responsibility centres in the organisation.
Profit centres: A place where the identification of revenues and costs are done are
known as profit centres. In Marks and Spencer a profit centre varies from a particular team,
person, machine etc (Fitó Bertran, Llobet and Cuguero, 2018).
Investment centres: Investment centres the one in which costs, revenues, capital
investments are identified. The centres can be both subsidiary and division in Marks and
Spencer.
Cost centres: The place where costs are traced and segregated are known as cost centres
in Marks and Spencer.
1.4 Classifications of cost and their uses
Marks and Spencer used different costing methods to determine and understand different
organisational functions. Types of costs and their uses are:
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Fixed Costs: Costs which are used by Marks and Spencer to fix the used inputs in their
production process are Fixed costs. These costs do not vary while the production volume
changes (Ogungbade and Tabitha, 2018).
Variable Costs: The types of costs are used by Marks and Spencer to determine the
production variable inputs. These costs vary when production volume changes.
Semi-variable Costs: Semi-variable costs are fixed and variable as well. They do not
impact the production level directly but varies when there is a change observed in production
facilities, depreciation and administrative cost.
1.5 Marginal and absorption costing differences
Absorption Costing Marginal Costing
Absorption costing takes both fixed and
variable costing under account.
Marginal costing do not take the method of
fixed costing into account during the valuation
of the inventory and costing the product.
The classification of this costing is done in the
category of production, selling, administration,
and distribution (Uzaman and et.al., 2019).
Marginal costing classification is done in
variable and fixed costs.
The purpose of Absorption costing is to
provide the right evaluation of profits
generated.
The purpose of marginal costing is to bring
forth the product's cost contribution.
In costing, absorption costing is the method
one the most conventional methods and is seen
to be used in financial purpose and reporting of
taxes.
The marginal costing methods is not seen as a
conventional method as it involves numerous
data analysing.
2. Cost information examination and recording
2.1 Recording information
Cost sheet
Particulars Amount
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Opening stock 11000
Add: Purchase 87000
Less Closing stock 8000
Total 94000
Direct wages 35000
Prime cost 129000
Factory overhead: 10% of direct wages 20000
Total 149000
Office overhead: 10% work cost 14900
Cost of production 163900
Add: O.S. Of finished goods 15000
Less: closing stock of finished goods 30020
Cost of goods sold 148880
Add: Selling and Distribution overhead 18000
Cost of sales 166880
Profit 39520
Selling price 206400
2.2 Analysis the cost information
From the above table, it has been analysed that direct labours are also collected
periodically from each section and direct material is a process of manufacturing which is charged
directly from the production of cost.
Prime cost is the sum of direct material consumed, direct labour and other material used
in it. Cost of goods sales is the amount which should not be made for sale and the profit is the
difference between sales and cost of sales (Capocchi, 2016).
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2.3 Different stages in inventory
Inventory revolves around the cycle of a set of different stages which includes raw
materials, work-in-process, the cost of goods sold and the goods which are finished. Below
explained as how these stages operate:
Raw materials: First stage of inventory revolves around the raw materials used for the
end product. These raw materials are made of basic goods which are converted into goods in the
next stage.
Work-in-process: The next stage of inventory revolves around the work that is in
process. In this stage, the raw materials are finalised and are brought into process to create a
product in Marks and Spencer.
Finished goods: After the manufacturing process, Marks and Spencer keep its finished
goods in warehouses which later are going to be sold in the markets to earn profits.
Cost of goods sold: The last stage in the inventory revolves around the generation of the
costs of the goods which are sold in the market.
2.4 Value inventory method
For FIFO method, the solutions is as follows:
Units available for sales = 68+140+40+78 = 326
Unit sold = 94+116+62 = 272
Unit in Inventory = 326-272 = 54
COGS Unit Unit cost Total
Sales from march 1 Inventory 68 £15.00 £1,020.00
Sales from March 5 Purchase 140 £15.50 £2,170.00
Sales from 11 March Purchase 40 £16.00 £640.00
Sales from March 16 Purchase 24 £16.50 £396.00
272 £4,226.00
Inventory from March 16 purchase 54 £16.50 £891.00
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Date Purchase Sales Balance
March unit unit cost Total unit unit cost total Unit Unit cost Total
1 68 £15.00 £1,020.00
5 140 £15.50
£2,170.
00 68 £15.00 £1,020.00
140 £15.50 £2,170.00
9 68 £15.00
£1,020.0
0 114 £15.50 £1,767.00
26 £15.00 £403.00
11 40 £16.00
£640.0
0 114 £15.50 £1,767.00
40 £16.00 £640.00
16 78 £16.50
£1,287.
00 114 £15.50 £1,767.00
40 £16.00 £640.00
78 £16.50 £1,287.00
20 114 £15.50
£1,767.0
0 38 £16.00 £608.00
2 £16.00 £32.00 78 £16.50 £1,287.00
29 38 £16.00 £608.00 54 £16.50 £891.00
24 £16.50 £396.00
LIFO method:
Unit Available for Sale = 60+140+70 = 270
Unit sold = 190+30 = 220
Unit in Inventory = 270-220 = 50
COGS Unit Unit cost Total
Sales from march 27 Inventory 70 £16.00 £1,120.00
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Sales from March 5 Purchase 140 £15.50 £2,170.00
Sales from 1 March Purchase 10 £15.50 £150.00
220 £3,440.00
Inventory from March 27 purchase 50 £15.00 £750.00
Date Purchase Sales Balance
March unit unit cost Total unit unit cost total Unit Unit cost Total
1 60 £15.00 £900.00
5 140 £15.50
£2,170.
00 60 £15.00 £900.00
140 £15.50 £2,170.00
14 140 £15.50
£2,170.0
0 10 £15.00 £150.00
50 £15.00 £750.00
27 70 £16.00
£1,190.
00 10 £15.00 £150.00
70 £16.00 £1,120.00
29 30 £16.00 £480.00 10 £15.00 £150.00
40 £16.00 £640.00
31 10 £15.00 £150.00
40 £16.00 £640.00
Weighted average method:
Unit available for sale = 60+140+70 = 270
Unit sold = 190+30 = 220
Unit in inventory = 270-220 =50
Weighted average unit cost Unit Unit cost Total
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March 1 Inventory 60 £15.00 £900.00
March 5 Purchase 140 £15.50 £2,170.00
27 march Purchase 70 £16.00 £1,120.00
270 15.52 £4,190.00
Date Purchases Sales Balance
Units
Unit
Cost Total Units
Unit
Cost Total Units Unit Cost Total
1 60 £15.00 £900.00
5 140 £15.50
£2,17
0.00 60 £15.00 £900.00
140 £15.00 £2,170.00
200 £15.35 £3,070.00
14 190 £15.35 £2,916.00 10 £15.35 £154.00
27 70 £16.00
£1,12
0.00 10 £15.35 £154.00
70 £16.00 £1,120.00
80 £15.92 £1,274.00
29 30 £15.92 £478.00 50 £15.92 £796.00
31 50 £15.92 £796.00
2.5 Cost behaviours
Below explained are the types of costs and their behaviours in context of Marks and
Spencer:
Fixed Costs: Fixed costs do not change with the level of activity happening in a relevant
range. Also, these costs incur even if there are none of the units are produced. Examples of such
costs include depreciation, straight-line, and rent expenses.
Variable Costs: Variable costs changes from direct proportion in Marks and Spencer to
the production level. Variable costs increase when numerous units are produced and decreases
when the production is low.
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Semi-variable Costs: Both fixed and variable costs components presence makes the
behavioural impact of semi-variable costs largely dependant on the side on which it is mostly
based upon in Marks and Spencer.
Step Costs: Step costs changes at discrete points rather than changing steadily at the
volume of activity happening within Marks and Spencer.
2.6 Costing systems and cost information
Below mentioned are the types of costing system and their cost informations:
Job costing: Job costing is known as a system that is used for tracking of the revenues
and job costs. It allows investigation which is standardized and job profitability as well.
Batch costing: In batch costing the items are generally stock manufactured. It allows
Marks and Spencer to understand the reaction of costs of manufactured items.
Unit costing: Unit costing revolves around expenditure that is total and Marks and
Spencer incurs to produce, store or sell single units of particular service or of its products.
Process costing: The method of process costing revolves around a simple method used to
collect and assign the produced units costs. In case when a number of identical units are
produced on large scale Marks and Spencer uses the method of process costing.
Service costing: Service costing method is used by Marks and Spencer when it is
providing services rather than producing goods.
3. Apportion cost
3.1 Describing overhead cost of production and service cost centre
Direct: It is the method under which the overhead cost are directly calculated such as
direct labour, cost and material.
Step down: It is the method that allocates the services cost to operate the departments in
well manner. This allocation is also start with the service department into the next highest cost.
3.2 Calculating overhead absorption rates using methods
1.Raw material cost basis:
Overhead absorption rate = Estimated FOH/ Estimated material cost * 100
= $150000/$110000*100
= $136.36% of direct material
Absorption of overhead on direct material cost:
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Overhead absorption rate* Actual material cost of job = Total overhead
136.36% * $240 = $27
2.Direct labour cost
Overhead absorption rate = Estimated FOH/ Estimated Labour cost * 100
= $150000/$90000 * 100
= 166.67% direct wages.
3.Prime cost
Overhead absorption rate = Estimated FOH/ Estimated Prime cost * 100
= $150000/$200000 * 100
= 75%
4. Unit of production basis:
Overhead absorption rate = Estimated FOH/ Estimated unit of output * 100
= $150000/500 * 100
= $30 per unit
Absorption of overhead based on the units of production:
Actual unit of output * overhead absorption rate= Total absorbed OHS
10 units * $30 = $300
Direct labour hours basis:
Overhead absorption rate = Estimated FOH/ Estimated unit labour hours * 100
= $150000/ 30000 hours * 100
= $5 per labour hours
Absorption of overhead based Direct labour hours basis :
Actual labour hours * overhead absorption rate= Total absorbed OHS
63 hours * $5 = $315
Machine Hour basis :
Overhead absorption rate = Estimated FOH/ Estimated machine hours * 100
= $150000/ 25000 hours * 100
= $6 per machine hours
Absorption of overhead based on machine hours basis :
Actual machine hours * overhead absorption rate= Total absorbed OHS
44 hours * $6 = $ 264
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3.3 Adjustments for overhead cost
(No. of machine* hours per week * No of \weeks p.a.)
(28*42*48)
56448 hours
Normal loss of hours on maintenance etc. p.a.:28*5*48 6720 hours
Effective \working hours p.a. 49728 hours
Machine hour rate = £ 124320/49728 = £2.50
(b) Overhead absorbed = 4200 hours @ £2.50 £10,500.00
Overhead incurred £10,200.00
Over absorption £300.00
Wages absorbed = (28*42*4) hours @ £15 £7,056.00
Wages incurred £7,440.00
Under absorbed £344.00
3.4 Reviewing method of allocation, apportionments and absorption
Allocation of overhead is used to determine the product cost and also used to control the
wastage and defectives (Polejewski, 2018).
Apportionments is the overhead which are not identified or allocated to a particular
department in M&S.
Absorption is the process of the overhead of a cost centre to different unit of cost and the
products and it is determine to the amount of overhead which is shared by the particular amount.
3.5 Communicate when the queries in overhead
In Marks and Spencer, if the firm is having any queries related to overhead then they can
directly communicate with the budget holder because only they are responsible for forecasting
any amount related to firm. As M&S also produces new products for the firm and in order to
overcome queries from the overhead, it is recommended to M&S to communicate to budget
holder.
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4. Deviation from the budget
4.1 budget cost and actual cost and variances
Forecasting budget Actual figures variance
Sales volume unit 1,000 2,000 1000
Sales and revenue 25, 000 32000 7000
Material 9,800 7,300 3700
Rent 1,500 2,400 900
Profit/ loss 37300 43700 6400
Budget cost- it is a tool which estimate the costs for the essential activities such as – production
cost, financial cost. It is plan to identify the expenses of the company for next year. Budget cost
helps to provide the services and manufacturing items. Budget cost helps to identify and clarify
the expenses.
Actual cost- it is accounting term which shows the amount of money that is going to be paid to
acquire the assets.
4.2 analyse the variance
Interpretation- it has been analysed that variance difference of actual financial statement
and forecasting financial statement. From the above table it has been analysed that actual salaezs
and volume unit is 2,000 and the forecasting budget is 1000 and variance of both the budget isd
1000. So from the table it has been founded that forecasting budget is similar to the pre decided
actual budget.
4.3 Presenting the information for budget holder
Initial responsibility of a budget holder is to forecast the budget process. Budget holder
makes the financial plans and policies to reach out the future goals of the company. They are
responsible to allocate the budget for different activities of the functional areas. Budget holder
plays and important role to find out the future cost of the product. They use the annual
management report to identify the future cost of the products.
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4.4 management report
Management reports shows the worth of a business over specified period. It also captures
the sort of data needed by the company. Management reports helps to provide the annual report
of the company.
5. Costing systems and decision-making
5.1 Preparing the estimates of future income
Relevant cost- it is a incremental and avoidable cost to make the business decisions. It
relates to a specific management decision. It is a current and future cost that differ the
alternatives for an example- marks and Spencer has decided to expand its sales and territory and
depreciation on the headquarter of the firm which is not relevant. The additional expense of new
territory and it sales are relevant to the decision.
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Break even analysis- it is management tool which helps to identify the state of the
company. It is very useful to know about the relations between fixed cost and variable cost. It
helps to cover the cost of doing business.
Margin of safety- it is difference between break even sales and actual sales. It is an
important figure to know about the reduction in revenue in result in break even (Sibirskaya and
et.al., 2019).
Target profit: It is the findings out the estimated business activities which perform to
earn the target.
Profit volume analysis: It is a chart which shows the earning of a company that is
directly related to volume of sales.
Limiting factor: This are the factors in which firm faces shortage regarding the
resources such as shortage of labour, machine hours etc.
Payback: It is capital budgeting method which is used to calculate number of days that
are required by the investment in order to earn enough money to pay.
Discounted cash flow: A method to asses the investment that are also taking account for
future estimation with present value.
5.2 The impact of changing activity levels on unit costs
Unit costs are the total number of expenditures incurred by the Marks and Spencer in
order to store, sell or produce a single unit of particular product or service. These costs include
costs such as fixed, variable, labour, overhead and of direct material. When Marks and Spencer
activity levels changes it directly impacts on the unit costs of the organisation. For example,
when the grocery production of Marks and Spencer is low as per the decreased demand from
outside (Ayres and Stanfield, 2019). The company's unit cost tend to incur less expenditure and
its will make its units costs low as well. Low unit costs will make the organisation to suffer from
less market profitability and decrease in overall organisational profits. Thus, the changing levels
of productivity can impact the organisations unit costs.
5.3 Calculate the effect of changing activity level
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5.4 Impacts on short-term and long-term decision making
Below explained are the factors that impact short and long term decision making in Marks and
Spencer:
Short-term
 Return on Investment: Marks and Spencer need to have good Return on Investment on
its sales of products and services. If the organisation is not having good ROI it might
make its profitability suffer.
 Brand Impact: The impact of the brand is another factor that makes the organisation
short-term decision making suffer. The brand impact is directly related to the reputation
of Marks and Spencer and can hinder its decision-making (Christian, 2018).
 Effect on resources: Marks and Spencer need to evaluate in what ways its resources will
be affected from the decisions made by the organisation. The resource are one of the
major source for the organisation to earn revenues and therefore it is essential.
 Risks: Risks also impact long term decision making in Marks and Spencer as it can both
break and make the reputation of the organisation on long term basis.
CONCLUSION
By summing up above report, it has been concluded that cost and revenue plays a
significant role in every business. Such that as report concluded that nature and role of costing
system in M&S. Further, present study also analysis cost information by using LIFO and FIFO
method. Report also concluded that apportion cost as per the requirement of organization and
also shows deviation from the budget.
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