Unit 6 Recording and Evaluating Costs and Revenues
Unit Commentary
This unit is concerned with how organisations record, analyse and report current and future costs and revenue data for use within the organisation. You will need to know that organisations build up costs and revenues in different ways. The ways costs are recorded vary with the type of industry as well as the measurement rules chosen by the organisation. You have to understand the meaning and consequence of these different ways of recording costs and revenues and be able to apply them in relevant circumstances.
There are three elements. The first element focuses on direct costs and revenues, the second on overheads. You will need to apply both types of cost to the reporting of the organisation’s expenses. In addition, you will need to apply both types of costing to the recording and analysing of unit and departmental costs. The third element is concerned with using cost and revenue information to help organisations make decisions. You will need to know about cost behaviour and apply it appropriately to managerial decisions for both short- and long-term planning purposes.
Elements contained within this unit are:
Element 6.1 Record and analyse information relating to direct costs and revenues
Element 6.2 Record and analyse information relating to the allocation, apportionment and absorption of overhead costs
Element 6.3 Prepare and evaluate estimates of costs and revenues
Knowledge and Understanding
To perform this unit effectively you will need to know and understand:
The Business Environment
The nature and purpose of internal reporting (Elements 6.1, 6.2 & 6.3)
Management information requirements (Elements 6.1, 6.2 & 6.3)
Maintaining an appropriate cost accounting system (Elements 6.1 & 6.2)
Knowledge and Understanding, continued
Accounting Techniques
Recording of cost and revenue data in the accounting records (Elements 6.1 & 6.2)
Methods of stock control and valuation including First In First Out, Last In First Out and Weighted Average Cost (Element 6.1)
Methods for and calculation of payments for labour (Element 6.1)
Procedures and documentation relating to expenses (Elements 6.1 & 6.2)
Bases of allocating and apportioning indirect costs to responsibility centres: direct and step down methods (Element 6.2)
Marginal versus absorption costing for costing and reporting purposes (Elements 6.1 & 6.2)
The arbitrary nature of overhead apportionments (Element 6.2)
Bases of absorption (Element 6.2)
Calculation of product and service cost (Elements 6.1, 6.2 & 6.3)
Analysis of the effect of changing activity levels on unit costs (Elements 6.1, 6.2 & 6.3)
Methods of presenting information in written reports (Element 6.3)
The identification of fixed, variable and semi-variable costs and their use in cost recording, cost reporting and cost analysis (Elements 6.1, 6.2 & 6.3)
Cost-volume-profit analysis (Element 6.3)
The identification of limiting factors (Element 6.3)
Methods of project appraisal: payback and discounted cash flow methods (NPV and IRR) (Element 6.3)
Accounting Principles and Theory:
Relationship between the materials costing system and the stock control system (Element 6.1)
Relationship between the labour costing system and the payroll accounting system (Element 6.2)
Relationship between the accounting system and the expenses costing system (Elements 6.1 & 6.2)
Marginal costing (Elements 6.1 & 6.3)
Absorption costing (Elements 6.2 & 6.3)
Cost behaviour (Element 6.3)
The principles of discounted cash flow (Element 6.3)
The Organisation:
Costing systems appropriate to the organisation: job, batch, unit and process costing systems (Elements 6.1, 6.2 & 6.3)
The sources of information for revenue and costing data (Elements 6.1, 6.2 & 6.3)
Element 6.1 Record and analyse information relating to direct costs and revenues
Performance Criteria
In order to perform this element successfully you need to:
A. Identify direct costs in accordance with the organisation’s costing procedures
B. Record and analyse information relating to direct costs
C. Calculate direct costs in accordance with the organisation’s policies and procedures
D. Check cost information for stocks against usage and stock control practices
E. Resolve or refer queries to the appropriate person
Range Statement
Performance in this element relates to the following contexts:
Direct costs:
Materials
Direct labour costs
Stocks:
Raw materials
part-finished goods
Finished goods
Element 6.2 Record and analyse information relating to the allocation, apportionment and absorption of overhead costs
Performance Criteria
In order to perform this element successfully you need to:
Identify overhead costs in accordance with the organisation’s procedures
Attribute overhead costs to production and service cost centres in accordance with agreed bases of allocation and apportionment
Calculate overhead absorption rates in accordance with agreed bases of absorption
Record and analyse information relating to overhead costs in accordance with the organisation’s procedures
Make adjustments for under and over recovered overhead costs in accordance with established procedures
Review methods of allocation, apportionment and absorption at regular intervals in discussions with senior staff and ensure agreed changes to methods are implemented
Consult staff working in operational departments to resolve any queries in overhead cost data
Range Statement
Performance in this element relates to the following contexts:
Overhead costs:
Fixed
Variable
Semi-variable
Bases of allocation and apportionment:
Direct methods
Step down methods
Bases of absorption:
Labour hour methods
Machine hour methods
Unit 6 Recording and Evaluating Costs and
Revenues
Element 6.3 Prepare and evaluate estimates of costs and revenues
Performance Criteria
In order to perform this element successfully you need to:
Identify information relevant to estimating current and future revenues and costs
Prepare estimates of future income and costs
Calculate the effects of variations in capacity on product costs
Analyse critical factors affecting costs and revenues using appropriate accounting techniques and draw clear conclusions from the analysis
State any assumptions used when evaluating future costs and revenues
Identify and evaluate options and solutions for their contribution to organisational goals
Present recommendations to appropriate people in a clear and concise way and supported by a clear rationale
Range Statement
Performance in this element relates to the following contexts:
Estimates:
Short term decisions:
Break-even analysis
Margin of safety
Target profit
Profit volume ratio
Limiting factors
Long term decisions:
Project appraisal using payback and discounted cash flow methods
Methods of presentation:
Verbal presentation
Written reports
