Chapter 1

Chapter 1: The costing system

Costing enables the managers of a business to know the cost of the firm's output. Once information is available, managers can use it to assist with decision making, planning for the future and the control of expenditure. By being able to work out the cost of a product or service, the managers of an organisation can then use this cost to: Determine a selling price Value inventory Provide information for financial statements Make management decisions A costing system is used by an organisation to collect information about costs and use that information for decision making, planing and control. 

What is financial accounting?Financial accounting is concerned with recording financial transactions that have happened already and with providing information from the accounting records.The main features of financial account are that it: Records transactions that have happened already Looks back to show what has happened in the past Is accurate to the nearest penny Is a legal requirement Maintains confidentiality of information. 

What is management accounting?Management accounting is concerned with looking at actual 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.  The main features of management accounting are that it:  Looks in detail at the costs and sales income Looks forward to show what is likely to happen in the future Uses estimates Provides management with reports Used internally Maintains confidentiality of information

The elements of cost: Materials  Labour Expenses

Materials costs include the costs of:- Raw materials- Products bought for resale- Service itemsLabour costs include:- Wages- Salaries- Public sector wagesExpenses includes all the other running costs of the business. 

The costs incurred in the factory are production costs. 'Production' is the function into which these costs are classified.We can divide these further into: Direct costs Indirect costs This analysis is sometimes called classification by nature. Direct costs - Costs that can be identified directly with each unit of output.Indirect costs - Costs that cannot be identified directly with each unit of output. 

Direct costs:Direct materials - The cost of the materials used to make the items produced.Direct labour - The cost of paying the employees who carry out the production.Direct expenses - There are very few examples (Don't worry about this)The total of direct costs is called the prime cost. 

Indirect costs:Indirect materials - The cost of materials that cannot be directly linked to specific items produced. Indirect labour - The cost of employing people in the factory who do not actually make the products.Indirect expenses - The other costs of running the factory. The total of direct costs and indirect costs is called the total production costs.