1.1.1 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.
1.1.2 Cost accounting is widely used by:
18.104.22.168 A manufacturing business
22.214.171.124 A business that provides a service.
1.1.3 By being able to work out the cost of a
product/service, the managers of an
organisation can then use this cost to:
126.96.36.199 Determine a selling price.
188.8.131.52 Value inventory.
184.108.40.206 Provide information for financial statements.
220.127.116.11 Make management decisions.
1.2 What is a costing system
1.2.1 A costing system is used by an organisation to collect
information about costs and use that information for
decision making, planning and control.
1.3 Financial accounting and management accounting
1.3.1 Financial accoutning
18.104.22.168 Financial accoutning is concerned with
recording financial transactions that have
happened already, and with providing
information from the accounting statements.
22.214.171.124 The main features of financial accounting are that it:
126.96.36.199.1 Records transactions that
have happened already.
188.8.131.52.2 Accurate to the nearest
184.108.40.206.3 Legal requirement.
220.127.116.11.4 Maintains confidentiality of
1.3.2 Management accounting
18.104.22.168 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.
22.214.171.124 The main features of management accounting are that it:
126.96.36.199.1 Makes estimates for the future.
188.8.131.52.2 Looks in detail at the costs and the sales income.
184.108.40.206.3 Provides management with reports.
220.127.116.11.4 Used internally within the business.
18.104.22.168.5 Maintains confidentiality of information.
1.4 Introduction to classifying costs and income
1.4.1 The elements of cost
22.214.171.124.1 Raw materials
126.96.36.199.2 Products bought for resale
188.8.131.52.3 Service items/consumables
184.108.40.206.3 Public sector wages
220.127.116.11.1 All other running costs of the business
1.5 Classification of costs by function and nature.
1.5.1 The costs incurred in the factory are production costs
18.104.22.168 Direct costs
22.214.171.124.1 Costs that cannot be linked
directly with each unit of
126.96.36.199.2 Direct materials
188.8.131.52.2.1 The cost of the materials used to make the items produced
184.108.40.206.3 Direct labour
220.127.116.11.3.1 The cost of paying the employees who carry out the production
18.104.22.168.4 Direcxt expenses
22.214.171.124 Indirect costs
126.96.36.199.1 Costs that can be directly
linked with each unit of
188.8.131.52.2 Indirect materials
184.108.40.206.2.1 The cost of materials that cannot be
directly linked to specific items produced.
220.127.116.11.3 Indirect labour
18.104.22.168.3.1 The cost of employing people
in the factory who do not
actually make the products.
22.214.171.124.4 Indirect expenses
126.96.36.199.4.1 The other costs of running a factory
2 Chapter 2: Cost centres and overhead absorption
2.1 Cost centres
2.1.1 Cost centres are sections of an
organisation to which costs can
2.2 Profit centres
2.2.1 Profit centres are sections of
a business to which costs can
be charged, income can be
identified and profit can be
2.3 Investment centres
2.3.1 A section of a business to which costs
can be charged, income can be identified
and investment can be measured.
2.4 Coding systems
2.4.1 Numeric coding
2.4.2 Alphabetic coding
2.4.3 Alpha-numeric coding
2.5 Units of output method
2.5.1 Budgeted overheads / Budgeted units of output
2.6 Direct labour hours method
2.6.1 Budgeted overheads/ Budgeted direct labour hours
2.7 Machine hours method
2.7.1 Budgeted overheads / Budgeted machine hours
3 Chapter 3: Cost behavior
3.1 The way in which costs alter
with changes in the level of
output or activity.
3.2 There are three main ways in which costs may behave:
3.2.1 Fixed Costs
188.8.131.52 Fixed costs do not alter when the
level of output or activity changes.
3.2.2 Variable Costs
184.108.40.206 Variable costs change in proportion to
the level of output or activity.
3.2.3 Semi-variable costs
220.127.116.11 Semi-variable costs contain both a fixed
element and a variable element.
3.3 Total costs:
3.3.1 Variable costs per unit X Output + Fixed
3.4 Unit costs:
3.4.1 Fixed costs / Output + Variable costs per unit
4 Chapter 4: Inventory valuation and the
4.1 Types of inventory:
4.1.1 Raw materials
18.104.22.168 These are the
materials that have
been bought by a
business and are
ready to be
transferred to the
where they will be
used to make the
22.214.171.124 This comprises part
finished products that
4.1.3 Finished goods
126.96.36.199 These are manufactured
items that have been
completed and are
ready for sale
4.2 Valuation methods:
188.8.131.52 A method of
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
184.108.40.206 This method of
assumes that the
acquired inventory will
be used first, leaving
acquisitions to make
up the value of the
This does not have to
correspond with the
actual order of
220.127.116.11 This inventory
a new weighted
average cost of
goods each time
that a new
purchase is made,
and using this
and balances until
4.3 Manufacturing account format:
4.3.1 Opening inventory of raw
4.3.2 Purchases of raw materials
4.3.3 Closing inventory of raw materials
4.3.4 Direct materials used
18.104.22.168 Opening inventory of raw materials +
Purchases of raw materials - Closing
inventory of raw materials
4.3.5 Direct labour
4.3.6 Direct cost
22.214.171.124 Direct materials used + Direct cost
4.3.7 Manufacturing overheads
4.3.8 Manufacturing cost
126.96.36.199 Direct cost + Manufacturing overheads
4.3.9 Opening inventory of work in progress
4.3.10 Closing inventory of work in progress
4.3.11 Cost of goods manufactured
188.8.131.52 Manufacturing cost +
Opening inventory of work
in progress - Closing
inventory of work in
4.3.12 Opening inventory of finished goods
4.3.13 Closing inventory of finished goods
4.3.14 Costs of goods sold
184.108.40.206 Cost of goods manufactured +
Opening inventory of finished goods -
Closing inventory of finished goods
5 Chapter 5: Labour costs
5.1 Time rate
5.1.1 Time rate is based on
payment for the amount
of time spent working.
5.2.1 An overtime rate is a time rate
that is paid for time worked in
excess of the normal contracted
5.3 Bonus payments
5.3.1 A bonus payment is an extra
payment paid to employees as
a reward for productivity.
5.4.1 Piecework is payment based on
the number of items produced by
6 Chapter 6: Budgets and variances
6.1.1 A budget is a financial plan for an organisation that is prepared in advance.
6.1.2 What is the purpose of a budget?
220.127.116.11 Creates plans
18.104.22.168 Co ordinates plans
22.214.171.124 used to monitor and control
6.2.1 The difference between the
budgeted figure and the actual figure.
6.2.2 Variances can either be:
126.96.36.199.1 Where the actual cost is greater than the budgeted cost
188.8.131.52.1 Where the actual cost is less than the budgeted cost