3. Purpose of costing
To enable managers to know the cost of an
organisation’s output
To assist with decision making, planning
and control
Applies to all organisations
(commercial, government, charities) whether:
Manufacturing
Providing services
Part of Management Accounting
4. Examples from class
What does your organisation do?
What is your output?
Why do you need to know costs?
How far ahead to you need to plan?
5. Definitely!
Helps determine a selling price or charges
Values inventory
Provides information for financial statements
Helps make management decisions
6. Need a costing system!
Used by the organisation to collect, evaluate
and apply information about costs
Needs to:
Be fit for purpose – ie varies depending on needs
Provide consistent approach throughout the
organisation – rules, policies, procedures
No legal/external requirements
Best fit and flexibility – regularly review to
accommodate changes to requirements
7. Financial
Accounting V Management
Accounting
ASSISTS IN DECISION
ASSESS FINANCIAL
MAKING, PLANNING AND
PERFORMANCE
CONTROL
Records Estimates, forecasts
and plans based on
historic, actual
historic and other
financial information
transactions
Focuses on internal
Focuses on external purposes and users
purposes and users Meets management
Meets legal requirements for
requirements for running the
reports and returns organisation
8. Data sources
Historic
Invoices(sales and purchase)
Receipts and payments
Payroll
Current and future
Purchase orders and quotations
Current budgets
Existing and new forecasts and estimates
Research internal and external sources
(HR, competition, trade
organisations, experts, government statistics)
10. Why bother classifying costs?
Looking at costs from different
perspectives
Better understanding of costs
Better decision making
11. NW Ltd
Sales &
Production Admin
Distribution
General
Factory 1 Factory 2 Stores HR
Admin
By FUNCTION (also: cost centre, profit
centre)
Function = section, department, division, sub-section, unit
Profit Centre = a cost centre that also generates income
12. MATERIA Raw materials and components for manufacturing
LS • Wood for making chairs
• Milk for making yoghurt
Products bought for resale
• Shoes for a shoe shop
• Carpets in furniture showroom
Service items or ‘consumables’ bought for use within
an organisation
• Stationery for the office
• Handwash for amenities
LABOUR All payroll costs of an organisation including wages for
production line workers, office staff, managers, sales
people, if you are paying a person to do a job that’s
labour
EXPENSE Refers to all other running costs and overheads of an
S organisation eg rent, heating, advertising, insurance etc, if
it is not materials or labour then it is expenses
13. DIRE INDIRE
CAN BE DIRECTLY
CT
RELATED/TRACED
MATERIA CANNOT BE
CT
DIRECTLY
to an item being LS RELATED/TRACED
produced or a to an item being
specific service LABOUR produced or a
provided EXPENSE specific service
EXAMPLES EXAMPLES
provided
Motor oil used S Oil used for
when servicing a maintenance of
car in a production
workshop machines
Labour costs for Salaries of HR
audit staff when staff in a college
auditing a client’s
company
accounts
14. BEHAVIOUR CHARACTERISTIC EXAMPLE
VARIABLE COSTS Change in direct relation Materials and/or labour
with output – ie per unit needed for production or
services eg:
* more bus routes -
more drivers needed
* 2 ltrs milk needed for
10 yoghurts, 4 ltrs milk
needed for 20 yoghurts
FIXED COSTS Do not change irrespective * Rent for the factory –
of output (unless stepped stays the same for 3
fixed costs: costs increase years until renewed
to a new fixed level when * Admin staff salaries
By BEHAVIOUR (variable,
output goes over a specific
fixed, semi-
variable) level)
SEMI-VARIABLE Part of the cost stays the * Telephone rental and
COSTS same, another part changes call costs
* Basic salary and sales
commission
