Basic CostingChapter 1,2,3

Costing provides information on the costs and income that arise from an organisation’s products or services. Costing can help managers with decision making, planning and control. A costing system will be designed with the needs of the organisation in mind. There is no ‘one size fits all’ approach, so the system can be as simple or as complex as the managers require. Costing is part of the area of accounting called ‘management accounting’. It concentrates on providing internal information about the future in a form that is useful and has no externally set rule that must be followed. There is a variety of sources of data within the organisation for costing, as well as some useful external sources. The data used will depend on whether the information required is for historic, current or future periods. Costs can be classified into the elements of materials, labour and expenses, and also by nature into direct costs and indirect costs (overheads). There are also functional classifications, the most common being production, administration, selling and distribution  and finance.

Chapter 1 Summary

Costing system – the system that an organisation has developed to collect information about costs and income so that it can be used to help with decision making, planning and control. Management accounting – 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. Financial accounting – the area of accounting that includes book-keeping; it concentrates on providing historic information that can be used internally and also provided to external parties. Budget – a future plan for an organisation, showing all the detail in financial terms; it is usually made up of various individual budgets. Cost classification by element – grouping costs together according to the type of cost based on three categories – materials, labour and expenses (overheads). Cost classification by nature – grouping costs together according to whether they are direct costs or indirect costs. Direct costs – costs that are directly identified with the units of output (the products or services that the organisation makes or provides) Prime costs – a term relating to the total of direct costs; it is often used to describe the total direct cost for a unit of output. Indirect costs (overheads) – costs that are not directly identified with the units of output; these costs are divided into production and non-production costs in a manufacturing organisation. Cost of production – a term relating to the total of direct costs and indirect production costs (production overheads).

Chapter 1 Key terms

Cost centres are used to help with the functional analysis of costs. Costs are collected in cost centres, and can be used to provide information to the manager responsible for the performance of a specific cost centre. Profit centres are used to collect data about both costs and income, and can therefore provide information about the profitability of that part of the organisation. Coding systems are used in many contexts and there are many examples of codes that we will use every day including postcodes and dialling codes. Different code structures have different advantages and disadvantages. Coding is used extensively for analysis of costs and income in costing systems. The types used mainly in costing are numeric, alphabetic and alpha-numeric. Codes may be used to analyse costs based on element, nature, cost centre or function or a combination of these classifications. Cost behaviour examines how costs respond to changes in the level of output or activity. Costs can behave in one of several ways, including as fixed costs, variable costs and semi-variable costs. An understanding of cost behaviour can be used to enable the calculation of total costs and unit costs using simple arithmetic.

Chapter 2 Summary

Cost centre – a section of an organisation to which costs can be charged. The number and type of cost centre would depend on the requirements of the organisation. Profit centre – a section of an organisation to which costs can be charged, income can be identified, and profits can be calculated. Coding system – a way of using unique headings to analyse data. They can also be used to place data in logical order if required. Numeric code – a code made up entirely of numbers Alphabetic code – a code made up entirely of letter of the alphabet Alpha-numeric code – a code made up of a combination of numbers and letters. Cost behaviour – the way that costs alter with changes in the level of output or activity. Fixed cost – a cost that does not alter when the level of output or activity changes. Variable cost – a cost that changes in proportion to the level of output or activity. Semi-variable cost – a cost that contains both a fixed element and a variable element

Chapter 2 Key terms

Inventories are held by manufacturing businesses in various forms – raw materials, work-in-progress and finished goods. A decision needs to be made on the method of inventory valuation that is to be used for raw materials. This is because inventory is made up of items bought at different prices and an assumption needs to be made for valuation purposes about the order that they are used up. The three main methods of inventory valuation for raw materials are: ·         First in first out (FIFO) ·         Last in first out (LIFO) ·         Average cost (AVCO) Each method involves calculation the value of issues and the remaining balance in different ways. Manufacturing accounts are used by businesses that produce goods to summarise the cost data for a period of time. The accounts are prepared in an established format and provide valuable information about the total costs at various stages. Manufacturing accounts use inventory valuations for raw materials, work-in-progress and finished goods at appropriate points to ensure that the information produced is valid and useful.

Chapter 3 Summary 

Basic Costing - Chapter 1

Basic Costing - Chapter 1

Basic Costing - Chapter 2

Basic Costing - Chapter 2

Basic Costing - Chapter 3