Basic CostingChapter 1,2,3

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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