1. The Costing System

2. Introduction to the Module
Understand and explain costing systems.
Identify sources of income and expenditure.
Identify cost, profit and investment centres.
Classify and record expenses.
Explain coding.
Classify inventory.
Calculate inventory.
Calculate labour payments.
Distinguish between cost behaviour, calculate cost behaviour.
Basic spreadsheets.

3. Aims of the Session Purpose of costing.
Differences between cost and financial accounting.
Classification of costs.

4. Purpose of Cost Accounting
Identify the cost of a business’ output and revenue from sales.
Decision making, planning and control.
Used in manufacturing – ie car manufacturing.
Service businesses – selling a holiday.
Answers questions such as:
The cost to provide a day’s training
The cost to carry out a surgical procedure.
The cost to produce a pair of jeans.
The cost to serve a generic fast-food meal from a golden-arched establishment.
The cost of a week’s holiday to Fantasy Island.
Ie, how much does it cost the business to provide the service or sell the product? Businesses want to make a profit, so need to know how much it costs provide it.
If a business knows how much profit it is likely to make then it can make decisions about spending/re-investing the profit and also control what is being spent.

5. What This Can be Used For
Key
Purposes
Determine selling prices.
The value of inventory.
Provide information for financial statements.
Make management decisions
To do this businesses need accurate cost information

6. What is a Costing System?
Very simple – quick calculations for products carried out by a small business owner selling goods on eBay Or
Very complicated – a series of spreadsheets providing a range of reports comparing actual results with budgeted ones.
It is what the business needs it to be, there are no external rules!
However, certain aspects of it such as inventory valuation do need to be done in a certain way for financial statements.
What costing systems are used where you work? For example here would be teaching hours.
Costs can be classified and we will be using ‘cost classification’ as term and you will be learning how this works for different organisations.

7. Two Types of Accounting?
Financial – ACCA, ACA, and ICEAW
Management - CIMA
Doing AAT up to L4 will give you various exemptions with CIMA and other professional accountancy bodies.
So far we’ve done financial accounting, this is an introduction to management accounting.

8. Financial v Management
Retrospective.
Timely, current.
Statement of profit or loss and financial position.
Management reports.
External users.
Internal users.
Legal requirement.
For company use.
True and fair view
Useful information
Timing – yearly for reporting purposes
Promptly when business requires
Purpose – assesses financial performance.
Accurate with no estimates.
Maintains confidentiality
Purpose – assists in decision making, planning and control

9. Financial Accounting Data
Information from:
Invoices for sales and purchases.
Payments.
Receipts.
Payroll.
Retrospective
Concerned with recording what has happened, and providing information from the accounting records to prepare things such as VAT return and financial statements.

10. Costing Accounting Data
Information from:
Current and estimated sources.
Quotations from suppliers.
Financial forecasts.
Projects to the future

11. Sources of Data for Costing Decimus Brutus

12. Classification of Costs

13. Classifying by ELEMENT
Material
Labour
Expenses

14. Materials Raw materials Components Products for resale
Consumables or service items

15. Labour Costs Payroll costs of all employees: Production line wages.
Wages and salaries of non-production staff.
Wages and salaries for those in the service industry.

16. Expenses Also known as overheads: Rent. Rates. Lighting.
Telephone bills.
Insurance.

17. Classification by NATURE
Direct costs linked to a unit of production.
Indirect costs not linked to a unit of production.

18. Total of direct costs also called PRIME COSTS
Identifiable with each unit of output:
Direct materials – wood to make chairs in a furniture factory.
Direct labour – workers making the furniture in the factory.
Direct expenses – normally ignored at Level 2!
Total of direct costs also called PRIME COSTS

19. Indirect Costs
Indirect materials – not linked to specific item, for example the blade in a saw making various items of furniture in factory.
Indirect labour – people employed, but not producing items, supervisors, cleaners, admin staff.
Indirect expenses – other costs such as heating and lighting.
Also know as OVERHEADS

20. Non-Production Costs Relate to support functions.
Always indirect costs.
Can be divided into areas such as:
Administration.
Selling and distribution.
Finance.

21. Classification by FUNCTION
Two main functions:
The factory – where goods are produced.
Warehouses and offices where support functions take place.
So production - fairly obvious
Support – admin, selling and distribution, finance,

22. Summary of Classification
Production Costs
Non Production Costs
Production
Direct Costs
Prime cost
Indirect Costs
Overheads
Admin
Indirect/ overheads
Selling & Distribution
Finance
Materials
Wood for tables
Oil for machinery
Stationery
Packing materials -
Labour
Assembly workers
Production supervisors
Admin staff
Salespeople
Expenses
Factory rent
Office rent
Advertising costs
Interest on loans
Total production costs
Total non-production costs
Total costs
In a furniture factory

23. Cougar Sports
Classify the following cost for a sports equipment manufacturer:
Factory insurance.
Wages of racquet stringer.
Wood to make bats.
Wages of production machine maintenance person.
Bank overdraft interest.
Admin department phone bills.
Delivery driver wages.
Floor cleaning fluid for factory cleaning.
Wages of office worker in admin department.
Stationery in administration office.
Fuel for delivery van.

24. Cost Classification in Non-Manufacturing Business
Same principles apply so:
Bus company?
Nature - direct costs/indirect costs.
Element – materials/labour/expenses.
Hairdresser?
Bus company nature – direct fuel, drivers’ wages, rent of bus depot, indirect advertising,
Element: fuel – material, drivers’ wages – labour, rent & advertising – expenses
Hairdresser: nature: shampoo, stylists’ wages – direct, receptionists’ wages and electricity – indirect
Element: shampoo – material, wages of stylist and receptionist – labour, electricity – expense.

25. Shando’s
Classify the following cost for a restaurant, specialising in chicken based meals:
Wages of cleaner.
Cost of heating the restaurant.
Wages of chef.
Telephone bill.
Paper table covers and napkins.
Ingredients for meals.
Cleaning materials.
Advertising costs.
Maintenance contract for ovens.
Wages of waiting staff.

26. Questions

27. Recap
Costing provides information on costs and income arising from a business’ products or services.
Costing is designed with the needs of the organisation in mind.
Costing is part of management accounting, and provides internal information.
The data used will depend on the what it is needed for.
Costs can be classified by element or nature or function.

28. Exercises