Cost and revenues are two separate elements of a business. Cost is the total amount which is involved in the manufacturing process of a products and revenues are the incomes that are generated by a business entity on the sales of those items. All the expenses that are related to material, labour and other overheads are considered by the companies while deciding prices of their manufactured products. This assignment is based on the concept of these two components. In this report various topics are discussed such as nature and role of costing system, recording and analysis of cost information, apportionment of costs according to organisational requirements etc. Analysis of deviations from budgets, reporting of them to the management and ability to use information which is gathered from costing system in decision making is also covered in this report.
1.1 Purpose of internal reporting and providing accurate information to management
Purpose of internal reporting: Internal reporting is conducted in all the business entities to analyse that organisation is performing well or not. If it is not good then strategic decisions can be taken by the managers in order to improve it.
Purpose of providing accurate information to management: It is very important to provide accurate, reliable and appropriate information to the management. Main purpose of this, is to facilitate managers in making right decisions for business and its betterment.
1.2 Relationship between various costing systems
All the business entities use two major type of costing system these are job and process costing systems. Both of them are interrelated with each other. In job costing material, labour and overheads are recorded for every task which is performed by the company. In second method all these elements are transcribed for entire production procedure (Yang and Chen, 2018).
When managers have any problem regarding production process as brief information is recorded in it, then job costing can be used to get detailed information for each expense hence both are related to each other.
1.3 Identification of responsibility, cost, profit and investment centres
Responsibility centre: It is subunit of a company for which a manager has responsibility and authority. These are the different functional departments within an organisation such as finance, marketing, human resource, IT etc.
Cost centre: It is a cost department of a business entity in which all the staff members and managers are responsible for costs related decisions not revenues. It includes production, maintenance and quality control divisions.
Profit centre: It is a central part of an enterprise which is responsible to make higher contribution in organisational profits. It includes selling department of the company.
Investment centre: It is an internal department of an organisation which utilises capital and funds appropriately in order to enhance overall profitability of the company. Sales and manufacturing departments are considered as the part of this centre.
1.4 Characteristics of different types of cost classifications and their use
There are five types of cost classifications by nature, in relation to cost centre, by time, for decision making and by nature of production process.
Characteristics of all of them are as follows:
- It helps to make best decisions for the organisation by segregating costs in various parts.
- All the classified costs helps to estimate expenses that may take place in future and then managers can plan in advance to bear them.
Uses of classification of costs:
- Classified costs are used to determine each cost which has been occurred in manufacturing process.
- These are also used to allot appropriate funds to different functional departments of the company according to their requirements by analysing their costs.
1.5 Difference between marginal and absorption costing
This method is used to separate fixed and variable costs.
It is used to absorb all the expenses from the sales of units.
In this costing technique costs are classified in fixed and variable.
In this method overheads are classified in production, administration, selling and distribution expenses (Difference between marginal and absorption costing, 2019).
2.1 Record of cost information for material, labour and expenses
Costing procedure is the activity of recording costs in appropriate accounts so that actual expenses can be determined that have taken place in manufacturing process. There are various types of costs that are faced by an organisation. These are material, labour and overheads (Wang and et.al., 2015).
There are three different types of materials that are raw, work in progress and finished goods. It includes direct and indirect and timbers for constructing house is an example of such expenses. Labours are the workers who are working in an organisation to manufacture products. These are the total of wages that are paid to the workforce.
There are two main types of overheads that are operating that are related to revenue generation process and non operating that are concerned with business execution process. Power, heat, postage, legal charges are example of them.
2.2 Analysis of cost information for material, labour and expenses
Material costs are recorded on the basis of total requirement of production or the desired units that are going to be manufactured by the company. It is a variable expense that changes with total production units. Labour cost is recorded on the basis of total workers who are involved in manufacturing process. It depends upon total items that are made by the company if it decreases or increases then wages paid to work force will also vary (Sufian and Kamarudin, 2015).
There are various types of expenses that are faced by all the business entities while producing products. Some of them are fixed and other are variable. These are rent, depreciation, insurance premium etc.
2.3 Various stages of inventory
There are three different stages of inventory, all of them are as follows:
Raw material: It is the first stage of inventory which is used to make a product. It is also known as unprocessed material and feed stock.
Work in progress: It refers to the process in which goods are partially manufactured. It is also known as in process inventory. The items that are waiting for completion are considered as work in progress stock.
Finished goods: It is the last stage of inventory in which goods complete the manufacturing process and not yet been presented in the market for sales (Shoup, 2017).
2.4 Record of cost information using different costing systems
Job: In job costing method costs of every task which is performed by the organisation is recorded. Managers may get detailed information of expenses that have taken place for that are faced by the company.
Batch: This method is used to take homogeneous products as cost unit for organisation. In this costing technique a batch includes a particular number of items or articles.
Unit: In this system cost that has taken place for manufacturing a specific unit of product is recorded. All fixed and variable expenses related to one item is considered in this method.
Process: Costs related to production process is recorded in this method. It is mainly used in those companies which manufactures products in large quantities.
Service: In this costing technique expenses related to each service rendered by a company is recorded. It is mainly used in hospitality industry.
3.1 Estimation of future income and costs for decision making using difference elements
Relevant costs: It is very beneficial for the company to estimate future income and costs because managers may determine all of them by analysing current year's figures.
Break even analysis: It is a method which is used to estimate the level where all the costs can be recovered and organisation can reach to a stage where no profits are acquired and no losses are faced.
Margin of safety: This method is used to measure soundness of organisation to exceed BEP sales. It can help to estimate that company is able to achieve higher profits in future or not with the help of gathered information.
Target profit: It is an expected amount of profits that are set by the managers as an target and they have planned to acquire reach the goal. It helps to predict possible future incomes as the target is made on the basis of estimation.
Profit volume analysis: In this analysis a specific percentage is analysed which is profit volume. It is based on sales and contribution of the company that can be used in future to estimate profits on units sold by the company (Govindan and Popiuc, 2014).
Limiting factors: Shortage of labour, machine hours and materials etc. are limiting factors for a company. These can be used to estimate future costs if organisation is having information of these components.
Payback: It is a method which is used by organisations to analyse the period in which all the invested amount is going to be recovered. If managers are having such information then they can estimate possible future incomes with the help of it.
Discounted cash flow: This method helps to forecast future incomes as it is an estimation method which is used to predict possible returns on a particular investment (Banker and Byzalov, 2014).
3.2 Effect of changing activity levels on unit costs
If an organisation make changes in level of activity then it will make various effects on unit cost. When it get exaggerated than total costs will also be enhanced which will result in increased production due to inflation in variable expenditures. Fixed expenses does not vary with such changes. In opposite condition when it get decreased then total costs will get declined and total manufactures units will be reduced. It will affect cost of each unit because in high production, cost will be low in lower production costs will be higher.
3.3 Calculation of the effect of changing activity levels on unit costs
An example which is based on estimation is being used to calculate the effect of changing activity level on unit costs. Calculations are as follows:
The Rising Rain Company's average cost for each unit is 1.425 for lower activity level which is 16000 units. For higher activity level of 20000 units the per unit cost is 1.38. Assuming that all of the activity levels mentioned in the question are in relevant range (Balakrishnan, Labro and Soderstrom, 2014).
Higher level of activity(20000*1.38)
Lower level of activity(16000*1.425)
From the above table it can be observed that changes in activities and units were 4800 pound and 4000 units. It will affect the cost of each unit which will decreased up to 1.20 (4800/4000).
5.4 Identification of factors that are affecting short and long term decision making
There are various types of factors that may affect long and short term decision making process of business entities. All of them are past experiences, an escalation of commitment and sunk outcomes, demand of customers, supply conditions, production, competitors in the market, buyer's bargaining power and their requirements. All long and short run decisions get affected due to these factors as all of them are based on them (Altug and van Ryzin, 2014).
From the above project report it has been concluded that costs and revenues are two different components that are used in costing system. Cost is total of all expenses that are faced by the business entities in manufacturing process and revenues are the receipts that are acquired from sales of products. There are two major types of costing techniques that are absorption and marginal. Both of them can be used by the organisations to separate different expenses such as fixed, variable etc.
- Altug, M. S. and van Ryzin, G., 2014. Is revenue sharing right for your supply chain?. California Management Review. 56(4). pp.53-81.
- Balakrishnan, R., Labro, E. and Soderstrom, N. S., 2014. Cost structure and sticky costs. Journal of management accounting research. 26(2). pp.91-116.
- Banker, R. D. and Byzalov, D., 2014. Asymmetric cost behavior. Journal of Management Accounting Research. 26(2). pp.43-79.
- Govindan, K. and Popiuc, M. N., 2014. Reverse supply chain coordination by revenue sharing contract: A case for the personal computers industry. European Journal of Operational Research. 233(2). pp.326-336.
- Kamarudin, F. and et.al., 2014. Cost, revenue and profit efficiency of Islamic and conventional banking sector: Empirical evidence from Gulf Cooperative Council countries. Global Business Review. 15(1). pp.1-24.
- Kimball, B. A., 2014. The Rising Cost of Higher Education: Charles Eliot's “Free Money” Strategy and the Beginning of Howard Bowen's “Revenue Theory of Cost,” 1869—1979. The Journal of Higher Education. 85(6). pp.886-912.
- Kong, C., Bayram, I. S. and Devetsikiotis, M., 2015. Revenue optimization frameworks for multi-class PEV charging stations. IEEE Access. 3. pp.2140-2150.
- Sahoo, B. K., Mehdiloozad, M. and Tone, K., 2014. Cost, revenue and profit efficiency measurement in DEA: A directional distance function approach. European Journal of Operational Research. 237(3). pp.921-931.
- Shepherd, R. W., 2015. Theory of cost and production functions (Vol. 2951). Princeton University Press.