Elements of costing

Chapter 1: The costing system
1. The purpose of costing
  1. Costing enables the managers of a business to know the cost of the firms output. Once costing information is available, managers can use it to help with decision making, planning and control of expenditure.
  2. Cost accounting is widely used by:
    1. A manufacturing business
    2. A business that provides a service.
  3. By being able to work out the cost of a product/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. 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.
3. Financial accounting and management accounting
  1. Financial accoutning
    1. Financial accoutning is concerned with recording financial transactions that have happened already, and with providing information from the accounting statements.
    2. The main features of financial accounting are that it:
      1. Records transactions that have happened already.
      2. Accurate to the nearest penny.
      3. Legal requirement.
      4. Maintains confidentiality of information.
  2. Management accounting
    1. Management accounting is concerned with looking at actul transactions in different ways from financial accounting. In this way, management accounting is able to provide information to help the business or organisation plan for the future.
    2. The main features of management accounting are that it:
      1. Makes estimates for the future.
      2. Looks in detail at the costs and the sales income.
      3. Provides management with reports.
      4. Used internally within the business.
      5. Maintains confidentiality of information.
4. Introduction to classifying costs and income
  1. The elements of cost
    1. Materials
      1. Raw materials
      2. Products bought for resale
      3. Service items/consumables
    2. Labour
      1. Wages
      2. Salaries
      3. Public sector wages
    3. Expenses
      1. All other running costs of the business
5. Classification of costs by function and nature.
  1. The costs incurred in the factory are production costs
    1. Direct costs
      1. Costs that cannot be linked directly with each unit of output.
      2. Direct materials
        The cost of the materials used to make the items produced
      3. Direct labour
        The cost of paying the employees who carry out the production
      4. Direcxt expenses
    2. Indirect costs
      1. Costs that can be directly linked with each unit of output.
      2. Indirect materials
        The cost of materials that cannot be directly linked to specific items produced.
      3. Indirect labour
        The cost of employing people in the factory who do not actually make the products.
      4. Indirect expenses
        The other costs of running a factory
Chapter 2: Cost centres and overhead absorption
1. Cost centres
  1. Cost centres are sections of an organisation to which costs can be charged.
2. Profit centres
  1. Profit centres are sections of a business to which costs can be charged, income can be identified and profit can be calculated.
3. Investment centres
  1. A section of a business to which costs can be charged, income can be identified and investment can be measured.
4. Coding systems
  1. Numeric coding
  2. Alphabetic coding
  3. Alpha-numeric coding
5. Units of output method
  1. Budgeted overheads / Budgeted units of output
6. Direct labour hours method
  1. Budgeted overheads/ Budgeted direct labour hours
7. Machine hours method
  1. Budgeted overheads / Budgeted machine hours
Chapter 3: Cost behavior
1. The way in which costs alter with changes in the level of output or activity.
2. There are three main ways in which costs may behave:
  1. Fixed Costs
    1. Fixed costs do not alter when the level of output or activity changes.
  2. Variable Costs
    1. Variable costs change in proportion to the level of output or activity.
  3. Semi-variable costs
    1. Semi-variable costs contain both a fixed element and a variable element.
3. Total costs:
  1. Variable costs per unit X Output + Fixed costs
4. Unit costs:
  1. Fixed costs / Output + Variable costs per unit
Chapter 4: Inventory valuation and the manufacturing account
1. Types of inventory:
  1. Raw materials
    1. These are the materials that have been bought by a manufacturing business and are ready to be transferred to the production area where they will be used to make the finished goods.
  2. Work-in-progress
    1. This comprises part finished products that are awaiting completion
  3. Finished goods
    1. These are manufactured items that have been completed and are ready for sale
2. Valuation methods:
  1. FIFO
    1. A method of inventory valuation that assumes that goods will be used up in the order that they are acquired. This means that the remaining balance will be valued based on the prices of more recent purchases.
  2. LIFO
    1. This method of inventory valuation assumes that the most recently acquired inventory will be used first, leaving the earlier acquisitions to make up the value of the remaining balance. This does not have to correspond with the actual order of usage.
  3. AVCO
    1. This inventory valuation method involves calculating a new weighted average cost of goods each time that a new purchase is made, and using this valuation for subsequent issues and balances until further purchases are made.
3. Manufacturing account format:
  1. Opening inventory of raw materials
  2. Purchases of raw materials
  3. Closing inventory of raw materials
  4. Direct materials used
    1. Opening inventory of raw materials + Purchases of raw materials - Closing inventory of raw materials
  5. Direct labour
  6. Direct cost
    1. Direct materials used + Direct cost
  7. Manufacturing overheads
  8. Manufacturing cost
    1. Direct cost + Manufacturing overheads
  9. Opening inventory of work in progress
  10. Closing inventory of work in progress
  11. Cost of goods manufactured
    1. Manufacturing cost + Opening inventory of work in progress - Closing inventory of work in progress
  12. Opening inventory of finished goods
  13. Closing inventory of finished goods
  14. Costs of goods sold
    1. Cost of goods manufactured + Opening inventory of finished goods - Closing inventory of finished goods
Chapter 5: Labour costs
1. Time rate
  1. Time rate is based on payment for the amount of time spent working.
2. Overtime
  1. An overtime rate is a time rate that is paid for time worked in excess of the normal contracted time.
3. Bonus payments
  1. A bonus payment is an extra payment paid to employees as a reward for productivity.
4. Piecework
  1. Piecework is payment based on the number of items produced by the employee.
Chapter 6: Budgets and variances
1. Budgets
  1. A budget is a financial plan for an organisation that is prepared in advance.
  2. What is the purpose of a budget?
    1. Creates plans
    2. Co ordinates plans
    3. used to monitor and control
2. Variances
  1. The difference between the budgeted figure and the actual figure.
  2. Variances can either be:
    1. Adverse
      1. Where the actual cost is greater than the budgeted cost
    2. Favourable
      1. Where the actual cost is less than the budgeted cost
  3. Budgeted cost - Actual cost
3. Reporting to managers
  1. Income
    1. Sales manager
  2. Materials
    1. Production manager
    2. Purchasing manager
  3. Labour
    1. Production manager
    2. Human resources manager
  4. Expenses
    1. Administration manager
  5. Production overheads
    1. Production manager
  6. Administration overheads
    1. Administration manager
  7. Selling and distribution overheads
    1. Sales manager
    2. Distribution/Transport manager
  8. Financial overheads
    1. Finance manager
    2. Company accountant

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Elements of costing

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