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.

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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

Marginal costing

Absorption costing

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