Chapter 1

Chapter 1

Purpose of costing
1. Enables the managers of a business to know the cost of the firms output.
  1. By being able to work out the cost of a product or service, the managers of an organisation can then use this cost to:
    1. Determine a selling price.
    2. Value inventory.
    3. Provide information for financial statements.
    4. Make management decisions.
2. Used with decision making, planning for the future and the control of the expenditure.
3. Cost accounting is used by:
  1. A manufacturing business which makes a product.
  2. A business that provides a service.
What is a costing system?
1. A costing system is used by an organisation to collect information about costs and use that information for decision making, planning and control.
Financial accounting and management accounting
1. What is financial accounting?
  1. The area of accounting that includes bookkeeping; it concentrates on providing historic information that can be used internally and also provided to external parties.
  2. The main features of financial accounting are that it:
    1. Records transactions that have happened already.
    2. Is accurate to the nearest penny.
    3. Is a legal requirement.
    4. Maintains confidentiality of information.
2. What is management accounting?
  1. The area of accounting that includes costing; it concentrates on providing internal information about the future in a form that is useful; it has no externally set rules that must be followed.
  2. The main features of management accounting are that it:
    1. Uses accounting information to summarise transactions that have happened already and to make estimates for the future.
    2. Looks in detail at the costs and the sales income of products and services.
    3. Looks forward to show what is likely to happen in the future.
    4. May use estimates.
    5. Provides management with reports that are of use in running the business/organisation.
    6. For internal use.
    7. Maintains confidentiality of information.
Sources of data for costing.
1. Costs can be seen as:
  1. Historic costs
  2. Current costs
  3. Future costs
2. Elements of cost:
  1. Materials
    1. Raw materials, resale items, service items.
  2. Labour
    1. Wages, salaries, public sector wages.
  3. Expenses
    1. Running costs of the business.
Classification of costs by function and nature.
1. Production costs
  1. Direct
    1. Direct costs are costs that can be identified directly with each unit of output.
    2. Direct materials:
      1. The cost of the materials used to make the items produced.
    3. Direct labour:
      1. The cost of paying the employees who carry out the production.
    4. Direct expenses:
  2. Indirect
    1. Indirect costs cannot be identified directly with specific units of output.
    2. Indirect materials:
      1. The cost of materials that cannot be directly linked to specific items produced.
    3. Indirect labour
      1. The cost of employing people in the factory who do not actualy make the products.
    4. Indirect expenses:
      1. The other costs of running the factory.
  3. Non-production costs:
    1. Administration
    2. Selling/distribution
    3. Finance

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