Elements of costing Flashcards
Cost accounting
A method of accounting where all the costs associated with a particular activity or product are collected together, classified
and recorded.
Management accounting
The process of preparing reports and accounts which can be used by managers as a basis for making decisions on the future performance of the business
Purpose of cost accounting
Enables managers to manage their business decisions more effectively and efficiently.
Cost classification
By element
By nature
By function
By element
Direct Cost and Indirect Costs
Direct Costs
Costs that can be specifically associated with the manufacturing of one unit of production
Examples of Direct costs
◦ Direct materials (materials from which goods are made, and carriage inwards paid on the materials)
◦ Direct labour (wages of workers who actually make goods)
◦ Direct expenses (will vary with the number of products such as royalties and license fees)
Indirect Costs (forms the overheads of the business)
Costs that cannot be specifically associated with the production of one unit of production
* e.g. nails and screws (indirect materials) in the manufacture of furniture
Examples of Indirect Costs
Indirect materials purchased for the factory (e.g. cleaning materials, lubricating oil for any machinery)
* Indirect wages – the wages of all factory workers who do not actually make the finished goods (e.g. factory managers, factory supervisor’s salaries, store staff and factory cleaners)
* Indirect expenses (expenses that will not vary with the number of products e.g. power, depreciation of machinery, factory rent, light and heat)
Advantage of cost classification by elements
High-cost elements will be identified, and remedial actions taken where possible
By function
Production, sales and distribution, administration and finance
* Includes both direct and indirect costs
Advantage of cost classification by function
Over-spending or high-cost departments
will be identified, and savings plans can be carried out
