MA - 3a - Cost Classification

Production overheads include: 1) Indirect materials, not traced to the finished product eg. (2) 2)Indirect Wages - all wages not charged to a product (1) 3) indirect expenses (other than materials and labour) not charged to production (2)

1) Consumable stores, materials used in negligible amounts 2) From non productive members of the department (eg. foreman) 3) i)Fees, rates, insurance ii) Depreciation, fuel, power

g) each item should have

a unique code

A Direct cost is a cost that can be ... in full back to the making of the product. An ... cost is one that is incurred in the process of making a product, providing a service or running a department, but cannot be ... in full...

traced indirect traced back to the product

m) codes should be u...

uniform

A business has the following costs for the period materials - $600 Labour - $1000 Production OHDs - $500 Admin OHDs - $700 tot $2800 If 100 units are produced in the period, what is the unit cost? When valuing inventory, only ... must be summed. This means that ... should be deducted before dividing the total costs for a period by ... to value each unit

$21 (exclude Admin OHDs and divide by no. units) production costs administration overheads number of units sold

eg. Materials - $600 Labour - $1000 Production overheads - $500 Administration overheads - $700 Total $2800 100 units produced - cost per unit?

((600+1000+700)/100)

Cost codes: Characteristics of coding: - Nature / s... classification - Type - Cost centre / o.. classification - Cost d...

(materials/labour/overhead) subjective (direct/indirect) (to which the cost should be allocated / charged) ie. objective classification department

Types of coding 1) c.. when the first three digits indicate the n.. of cost (s.. classification) and the second three digits indicate the d.. / c.. c.. (o.. classification) 2) s.. (s.. classification) each cost item given a s.. code 3) G.. c... c.. 4) F.. c.. - where each digit gives information about s.. 5) S.. d.. c.. - where digits included in the code give information about q.. s.. (eg. mm / g.) 6) H.. c.. - each subsequent letter allocates the cost item to a s.. subset

1) composite / nature / subjective / department / objective 2) sequence / subjective / sequential 3) Group Classification code 4) Faceted / specifications 5) Significant digit codes / quantitative specifications 6) Hierarchical / smaller

Two trends are identifiable in Direct Labour costs: 1) As the use of labour decreases and machinery increases ... 2) As direct labour costs decrease...

1)The ratio of direct labour costs to total product costs falls 2) The costs of skilled labour / sub contractors increases

The cost of closing (unsold) inventory is also affected During the period 80 units are sold at 40$ each The gross profit is therefore Sales (80x40) - $3200 Cost of sales (80 x 21) - $(1680) Gross profit $1520 Value of closing inventory will be

20 x 21 ($480)

Cost unit:

A unit of product or service in relation to which costs are ascertained - basic control unit for costing

Functional Costs 1)Production:

Any costs relating to: Receiving raw materials Turning those into a finished product Preparing them for warehousing to be despatch Primary packagin

Direct Expenses

Any expenses which are incurred on a specific product other than direct material costs / wages

6) Financing costs

Assoc with financing the business, eg. loan finance

Classification by function:

Classifying costs by manufacturing/production, distribution (warehouses / depots) , administration (offices) or marketing / sales

Responsibility centres: broader term for ... whose performance is the direct responsibility of the manager (4)

Cost centres, revenue centres, profit centres, investment centred

3)Selling /Marketing

Cost of generating demand for products and securing orders from customers

The cost of making a product consists of: (1-3(i-iii))

Cost of materials Cost of wages & salaries Cost of: Rent / rates Gas / bills Depreciation

Distribution overheads include: 1) 2) 3)

Cost of packaging materials Salaries of staff in warehouses Rent, rates, insurance within warehouses / facilities

4) Distribution costs

Costs relating to: Receipt of finished goods from production Preparing for despatch Reconditioning of empty containers for reuse

Full cost of Sales / common build-up of costs: A B C A+B+C D A+B+C+D E F A+B+C+D+E+F

Direct Materials Direct Wages Direct expenses Prime Costs Production overheads Full factory costs Admin costs Selling & Distribution costs Full cost of Sales

Business Premises

Fixed cost - at lease within a stated time period

Types of cost include: i)Direct (3) ii) Overheads (3)

Labour, Materials, Expenses Production, Administration, General

Direct material costs are charged to the product as part of the ... cost. Examples of direct material: 1) c.. p.. 2) p...-f...w.... 3) p.. p.. m..

Prime Component parts Part-finished work primary packaging materials

2) Administration costs

Running / managing / controlling the business - not if it involves production/sales/distribution. marketing

Administration overheads include: 1) 2) 3)

Salaries of managers and secretaries Rent, Rates and bills, insurance, lighting, cleaning, utilities Depreciation of the buildings

5)Research costs / development costs

Searching for new/improved products / improving current ones

Telephone charges?

Semi-fixed / semi-variable overhead Increased activity --> more calls; line rental is a fixed element

Distribution overhead: 1) All indirect...

Wages, expenses and material costs involved in making the packaged product ready for despatch and delivering it to customers

k) Code numbers should be issued from ...

a central point

Production Overhead: Production includes:

all indirect costs (material costs, wages, expenses) incurred in the factory from the date of receipt of the order until its completion

Direct wages may considered as deriving from employees who: 1) 2) 3) And are included in the prime cost of the product

alter the condition or composition of the product Inspect / test the product as required sell / manage the production of the product or whose wages are specified as being included

Variable costs change ...

as the level of activity in the business changes

Profit centres are similar to cost centres but are accountable for ... Some businesses work on a Should normally have control over... often, several cost centres... the profit centre will make decisions about both... and ... and will do so as ... as possible Profit centre manager wants information about both .. They are judged by ... achieved by their division In practice, they cannot control ..., so they should be judged on contribution, which is ...

both costs and revenues .. profit centre basis how revenue is raised and costs are incurred will make up a profit centre purchasing and selling profitably revenues and costs profit margin fixed costs revenue - variable costs

b) brief but...

brief, but long enough to allow each code to be unique

Investment centres: profit centre with additional responsibilities for ... and; their performance is measured on They will be judges on their handling of ... and will seek to make only investments which y... They require the information needed by the p... manager and, additionally, ... They will have to make decisions on the purchase / ... of ... as well as the i... of s... cash

capital investment financing return on investment cash surpluses yield a higher percentage than the company's notional cost of capital profit manager information on the investments already undertaken lease ... capital ... surplus

They are also referred to as c... e... They must charged to the product as part of the p... c... examples include (2) 1) hire of ... 2) m... of the above

chargeable expenses prime cost tools maintenance

Cost centres

collecting centres to which costs are allocated before being analysed into cost units

Selling overheads include (4) 1) Salaries / 2) Brochures/ ... 3) Advertising... 4) Rent, rates...

commissions of sales staff catalogue printing Sales promo, market research Bad debt, insurance of sales offices/show rooms

A cost unit is an individual unit of product or service for which ... A cost unit will mean different things to different businesses and it is normally a single unit of what that business ... For example, a car manufacturer's cost unit will be a car. Here are some examples of cost units for some different, typical types of businesses: A brewery - barrel of beer An accountancy practice - chargeable hour A college - a student A hospital - a patient A hotel - a bed night or room night

costs can be separately ascertained. produces.

Cost centres are the building block of the costing system. They allow: 1) 2) 3)

costs to be allocated budgets to be prepared management control (comparison of actuals against forecast)

Material, Labour and Expenses can be considered ... or ...

direct indirect

Production costs are all costs involved in the manufacture of goods includes

direct labour, direct materials manufacturing overhead

Non-production costs are taken eg.

directly into the statement of profit and loss as expenses during the period in which they are incurred costs of selling and administrative costs

h) the likellihood of ... should be minimised i) the system should avoid problems with similar ...

errors in coding characters ie 1 & l ; o and 0

Direct Wages. All wages paid for work ...

expended on manufacturing the product itself

Costs can be semi-

fixed or variable

Sales commissions?

fixed percentage of turnover - increase as turnover increases - TF variable

f) code should be ... so that small changes in a cost's classification can be incorpoated without...

flexible / without major changes to the coding system itself

c) the system should allow...

for expansion

Fixed or variable? Materials?

go up as activity / production increases - TF variable

e) if there is conflict between the ease of using the code and the difficulty of its manipulation on a computer ... should dominate

human interest

j) there should be a readily available

index of codes

Are group bonus schemes usually a direct or indirect cost?

indirect

Administration Overhead Is all...

indirect labour, material and expenses incurred during the execution of an undertaking

the basic rate for overtime is/isn't part of the direct wages cost?

is

an overtime premium is/isn't part of the direct wages cost?

isn't

d) they should be entirely ..

made up of letters or numerals

Direct material is ...

material that is shown to go straight into the product

Selling overhead: All indirect...

materials, wages and expenses related to selling to and retaining customers

p) if the code consists of letters,... should be used ie. it should be derived from the item's name

nmemonics

Examples of cost units In a hospital In a hotel in the brewing industry

patient episodes rooms barrels

Revenue centres are accountable only for.. Managers should have control over how .. They are not accountable ... and are aiming purely to ... They want information on .. and will look closely at ... and the ... performance of competitors in addition to monitoring revenue figures

revenue revenues are raised for costs maximise sales revenue markets and new products pricing and competitor sales

Advantages of a coding system (3) 1) Digit-based codes are shorter and therefore... 2) more precise and therefore 3) facilitate

save on clerical time and take up less computer space reduce ambiguity computer processing

o) code should be s...

significant ie. carry meaning

Fixed costs ...

tend not to rise as level of activity arises

Codes should be: (16) a) easy...

to understand

A cost object helps to measure and tell ... A cost object can include: The cost of a product The cost of providing a service to customers The cost of operating a department The cost if resources used Typically cost is accounted for in two stages: Classification of cost (Such as labour, materials and overhead cost). Assigning costs to cost objects. The most commonly used type of cost object is known as a

users of accounting information about the cost of something. 'cost unit'.