Elements of Costing Flashcards
Things Businesses Gather Information On
Sales transactions, data on costs associated with business processes, records of people employed by the business, inventory files
Why Business Managers Gather Information
Make decisions, make plans, control
Short Term Decisions
For example, which products to make and how much raw material to order
Long Term Decisions
For example, which products to stop making and how many staff to employ
Make Plans
Business has to look forward to plan its long-term operations, usually involving the preparation for budgets,which are financial plans for either the whole or part of the business for a period of time in the future
Control
Management will be concerned with how the business has actually performed in comparison with budgets set out in the previous period
Financial Accounting
Involves the production of financial accounts, which are a historic record of all the organisation’s statements. Normally include: statement of financial position (balance sheet), statement of profit or loss (profit or loss account). Typically produced annually, presented in set formats which are laid down by law. Usually provided to external groups, e.g. potential (or existing) investors or tax authorities, show how business has performed over a period of time.
Management Accounting
Provides information to internal users, e.g. managers. Normally includes: preparation of budgets + comparison to actual results, calculation of costs of manufacturing products that the business sells. Tend to be produced on a regular basis (often monthly) and can be in any format. Contain whatever info management feels will be useful. Typically forward looking and try to predict future costs/income to help managers make key business decisions
Cost Units
An individual unit for which the costs can be separately identified. Usually a product that the company makes, such as a particular car
Cost Centres
A part of the business for which costs can be separately determined. For a car manufacturer, there could be several, such as warehouse or factory. Each will have different sets of costs attributed to it.
Profit Centres
Similar to a cost centre, but has identifiable revenues in addition to costs. A car manufacturer’s sales division would have both costs (inc. salaries and rent) and revenue (sales of cars to customers) that could be directly attributed to it
Investment Centres
Similar to a profit centre, but occurs when the manager of the centre is responsible for costs, revenues and the level of investment in assets within the division. For example, manager of car manufacturer’s sale division may have control over office’s expenditure on computers and furniture. This would mean the division would be an investment centre
Cost Classification by Function
Split costs into 4 types: cost of sales (production costs), selling and distribution, administrative costs, finance costs
Cost of Sales
Known as production costs. Could include: production labour, materials, supervisor salaries and factory rent
Selling & Distribution
Includes any cost involved in selling, advertising or distributing our product, and may include sales team commission or delivery costs
Administrative Costs
Includes head office costs, IT support and human resource management costs
Finance Costs
Refers to money paid to providers of finance (e.g. banks) and includes bank charges, and interest charged on loans
2 Issues when Classifying Costs by Function
1) Examine what the company produces or the service it offers, e.g. book publisher buys paper - cost of sale, but car manufacturer buys paper, used at head office and likely an administrative cost
2) look out for depreciation - measure of how much an asset is wearing out or being used up. Classification will depend on the asset - depreciation of delivery vans would be distribution cost, but depreciation of production machine would be cost of sales
Cost Classification by Element
Costs Classified by what type of cost they are. 3 types: materials, labour and overheads
Materials
Costs of the purchases of raw materials to be used in the manufacturing process in a manufacturing organisation, OR the cost of purchasing goods that are to be resold in a retail organisation
Labour
Consists of the costs of business employees, such as basic pay, overtime, commissions and bonuses
Overheads
Also known as ‘other expenses’ - costs incurred by the organisation other than labour and materials, such as rent, rates, heat and light, cleaning, advertising etc.
Cost Classification by Nature
Helpful when wanting to calculate cost per unit. 2 types: direct costs and indirect costs
Direct Costs
Costs that can be directly traced to individual units of production (cost units). May include direct materials and direct labour, which could be traced to an individual item (e.g. serial number on a car chassis). Total direct cost may also be known as prime cost
Indirect Costs
AKA overheads - costs incurred by the company which cannot be traced to any one finished unit. For example, factory rent - does not link to a specific product
Variable Costs
Costs that vary directly with the level of activity, most costs are variable (make fewer units, buy fewer materials and will save on labour costs)
