Principles of Costing Flashcards
Different costing systems?
- Financial accounting
- Management accounting
- Cost accounting (Large part of Management accounting)
Aspects of Financial accounting?
- External groups - Business owner, Investors & HMRC.
- Insufficient for management decision making.
- Produced once a year.
- Historic records -> presented in a standard format laid down in law:
- Statement of financial position (Balance sheet)
- Statement of Profit & Loss (Income statement/P&L account)
Aspects of Management accounting?
- Internal groups.
- Actual results vs. predicted results -> Future predictions.
- Produced frequently in any format.
- Financial & non-financial information.
- Assist management with planning, control and decision making.
Aims of management accounting?
- Planning - Preparing annual budgets.
- Co-ordinating - All departments to work together.
- Controlling - Actual vs budget -> Issue -> Investigate -> Acting on results.
- Communicating - Preparing budgets to assist department managers to explain aim of business.
- Motivating - Targets to improve performance
Management fundamental functions?
- Planning
- Control
- Decision making
What is a cost unit?
Costs that can be separately identified.
Responsibility centres
- Cost centre - Only occurs cost
- Revenue centre - Selling activity generating income
- Profit centre - Cost and Revenue
- Investment centre - Profit and
Purpose of cost classification?
- Function - Preparing financial accounts.
- Element - Cost control.
- Nature - Cost accounting.
- Behaviour - Budgeting and decision making.
Classification by function?
- Cost of sales - Production cost & depreciation of machines.
- Selling & distribution - Selling, advertising, distributing, sales teams commission, delivery cost and depreciation of delivery vehicles.
- Administrative cost - Head office cost, IT support, human resources management cost and depreciation of printer.
- Finance - Bank charges and interest charged on loans.
Classification by element?
- Materials - Go into what is made
- Labour - Paid to staff
- Overheads - other expenses
Classification by nature?
- Direct: (Total direct cost = Prime cost)
- Direct materials - Used in production
- Direct labour - Manufacturing staff wages
- Direct expense - product royalty
- Indirect: Overheads
- Indirect material - Oil for production machine.
- Indirect labour - Supervisor salaries.
- Indirect expense - Rent & power.
Classification by behaviour?
- Fixed - Total cost doesn’t change with activity, but unit cost decrease with increase of activity.
- Variable - Total cost change with activity, unit cost doesn’t change.
- Semi-Variable - Fixed & Variable cost.
- Stepped - Fixed for certain level of activity, rises and then fixed for another certain level of activity.
Benefits of coding?
- Facilitate data processing
- Logical arrangements of records
- Comparisons of similar expenses
Product cost vs. Period cost?
Product: (Incurred to the product)
Direct materials, direct labour and absorbed production overheads.
Period: (Financial year)
Admin cost, selling & distribution cost and finance cost.
Two aspects of valuing raw materials?
1) Costing - Cost of materials issued to production centres. (Include on cost card for the unit)
2) Financial reporting - Value the inventory of materials left. (Include in the financial statement)
Methods of inventory valuation?
- FIFO - First In, First Out (e.g. Perishables)
- LIFO - Last In, First Out (e.g. Stationery)
Not acceptable by HMRC or International Accounting Standard 2 for inventories. - AVCO - Weighted average (e.g. New oil mixed with old oil)
Average price per unit = Total inventory value / Total inventory units
Advantages/Disadvantages - FIFO
Advantages:
* Up to date inventory value at SOFP.
* When prices rise -> Highest profit
Disadvantages:
* Out of date valuation on issue - if prices change or using old prices.
* Slow record keeping
* Similar jobs have different cost.
Advantages/Disadvantages - LIFO
Advantages:
* Up to date valuation on issues.
Disadvantages:
* Out of date closing inventory - old purchases.
* Slow record keeping
* Similar jobs have different cost.
Advantages/Disadvantages - AVCO
Advantages:
* Compromise on inventory valuation and issues.
* Simpler record keeping.
Disadvantages:
* Calculating is slow on every receipt/issue
* Average price rarely reflects purchase price.
The five main sections in a manufacturing account?
1) Direct materials used
Opening + Purchase - Closing
2) Direct cost (Prime cost)
Stock used + Direct Labour
3) Manufacturing cost
Direct cost + Manufacturing Overheads (Indirect cost)
4) Cost of goods manufactured
Manufacturing cost + Opening WIP - Closing WIP
5) Cost of goods sold
Cost of good manufactured + Open inventory of goods sold - Closing inventory of goods sold
Inventory control
- Cost of carrying inventory
- Buffer inventory
- Reorder quantity
- Reorder timings
Direct vs. Indirect Labour
- Direct labour - Related to goods/service
e.g. Production workers - Indirect labour - Not related to goods/service
e.g. Supervisor/cleaning staff
Two methods calculating wages
1) Time related - Time at work
* Salary - (Fixed cost)
* Hourly - paid per hour (Variable cost)
2) Output related - Work produced
* Piecework
* Piecework with guarantee
2 types of overtime
- Overtime
Overtime * 1.5 - Overtime premium
Overtime * 0.5
Types of bonuses
1) Individual bonuses
* Basic wage - Hours worked or output produced.
* Bonus - Quantity produced or time saved.
2) Group bonuses
* Group output produced
3) Bonus caps
* Bonus for certain level of output
Different overhead absorption rates?
- Unit basis (Only one product) =
Budgeted overheads/budgeted units produced - Labour hour basis (Labour intensive) =
Budgeted overheads/budgeted labour hours (Multiply with the labour hours used to complete a unit) - Machine hour basis (Highly automated) =
Budgeted overheads/budgeted machine hours (Multiply with the machine hours used to complete a unit)
What is a budget?
Financial plans relating to the future.
Why budgeting?
- Planning: Plan for the future, set targets and anticipate problems.
- Control: Calculate variances (Actual vs. Budget), investigate any issues and take appropriate action.
- Communication: Communicate plans budget holders and employees.
- Co-ordination: All functions works towards the same goal.
- Motivation: Budgets set targets that related to the reward system.
- Evaluation: Unit and managers performances are evaluated via variance analysis.
Types of budgets?
- Fixed budget:
Single activity level. Not useful for control purposes due to not making like-for-like comparison. - Flexible budget:
Changes as volume of activity changes. Flexible budget vs Actual will provide more useful info.
Difference between Favourable/Adverse variances?
Favourable variance:
* Actual cost < Budgeted cost
* Actual revenue > Budgeted revenue
* Effect of increasing profit.
Adverse variance:
* Actual cost > Budgeted cost
* Actual revenue < Budgeted revenue
* Effect of reducing profit.
When is a variance significant?
A variance can only be reported or investigated when it goes above a set criteria. (Exception reporting)
Causes of variances?
- Sales variance - Price or volume
- Material variance - Price or usage
- Labour variance - Rate or efficiency
- Overhead variance - Expenditure
- All - Poor planning
