In this chapter, we begin to look at cost accounting systems and the ways in which costs may be classified. Costs are classified in a variety of different ways, according to purpose for which the management information is required.
The chapter also introduces two basic building blocks of costing systems: cost centers and cost units.
Knowledge of the various classifications of cost, as well as cost centers and cost units, are important for an understanding of cost and management accounting methods and techniques, which will be described in subsequent chapters.
Cost classifications in a cost accounting system
The total cost of making a product or providing a service consists of the following:
1. cost of materials
2. cost of the wages and salaries (labor costs)
3. cot of other expenses:
- rent and rates
- electricity and gas bills
- depreciation
Direct costs and indirect costs
Direct costs
A direct cost is a cost that can be traced in full to saleable cost unit (products or services) that are being costed. The sum of the direct costs is known as the prime cost.
1. direct material costs
2. direct labor costs
3. other direct expenses
Indirect cost/overhead
An indirect cost or overhead is a cost that is incurred in the course of making a product or providing a service, but which cannot be traced directly and in full to the product or service.
Production overhead includes all indirect material cost, indirect wages and indirect expenses incurred in the factory from receipt of the order until its completion, including:
- indirect materials
- indirect wages
- indirect expenses
Administration overhead is all indirect material cost, wages and expenses incurred in the direction, control and administration of and undertaking, including:
- depreciation of office equipment
- office salaries
- rent, rates, insurance, telephone, heat and light cost of general offices
Selling overhead is all indirect material costs, wages and expenses incurred in promoting sales and retaining customers, including:
- printing and stationery, such as catalogues and price list
- salaries and commission of sales representatives
- advertising and sales promotion, market research
- rent, rates and insurance for sales offices and showrooms
Distribution overhead is all indirect material costs, wages and expenses incurred in making the packed product ready for dispatch and delivering it to the customer, including:
- cost of packing cases
- wages of packers, drivers and dispatch clerks
- depreciation and running expenses of delivery vehicles
Classification by functions
Classification by function involves classifying costs as:
1. production cost: are costs which are incurred by the sequence of operations beginning with the supply of raw materials and ending with the completion of the product ready for warehousing as finished goods item.
2. administration costs: are the costs of managing an organization planning, and controlling its operations, but only insofar as such administration costs are not related to the production, sales, distribution or research and development functions.
3. selling costs (marketing costs): are costs of creating demand for products and securing firm orders from customers.
4. distribution costs are the costs of the sequence of operations with the receipt of finished goods from the production department and making them ready for dispatch and ending with the reconditioning for reuse of empty containers.
5. research costs: are the costs of searching for new or improved products, whereas development costs are the costs incurred between the decision to produce a new or improved product and the commencement of full manufacture of the product.
6. financing costs are costs incurred to finance the business such as loan interest.
Classification by behavior
Classification by behavior is the cost classification according to how they vary in relation to the level of activity.
1. A fixed cost is a cost which is incurred for a particular period of time and which, within certain activity levels, is unaffected by changes in the level of activity.
2. A variable cost is a cost which tends to vary with the level of activity.
3. A semi-fixed or semi-variable or mixed cost is a combination of fixed and variable cost. It may be divided into its fixed and variable elements.
Classification by responsibility
Cost centers are collecting places of overheads before they are further analysed.
Cost centers are an essential building block of a costing system. They are the starting pointing for the following:
- the classification of actual costs incurred
- the preparation of budgets of planned costs
- the comparison of actual costs and budgeted costs (management control)
A cost unit is a unit of product or service to which direct costs can be related.
A cost object (or objective) is any activity for which a separate measurement of cost is desired.
- the cost of a product
- the cost of a service
- the cost of operating a department
No comments:
Post a Comment