Two basic stages in Costing System

I. Cost AccumulationCollection of cost data in organised way through an accounting system- accumulates costs by classification such as materials, labour, fuel, advertising or shippingII. Cost AssignmentAssigning costs to costs objectsi. Tracing accumulated costs to a cost object direct costsii. Allocating accumulated costs to a cost object indirect costsiii. Costs incurred (historical costs) as distinguished from budgeted/forecasted costs actual costsDirect Costs costs related to the particular cost object and that can be traced to it in an economically feasible (cost-effective) wayIndirect Costs costs that are related to the particular cost object but cannot be traced to it in an economically feasible (cost-effective) wayCost Reduction and Cost Management

I. Focusing on value-added activities that is those activities that customers perceive as adding value to the products/services they purchaseII. Efficiently managing the use of the cost drivers in those value-added activitiesCost-Drivers (aka cost generator, cost determinant)- factor that affects total costs- change in level of cost driver will cause of a change in the level of the total cost of a related cost objecte.g. R&D no. of research projects, labour hours on a projectVariable Costs- costs that changes in total in proportion to changes in related level of total activity or volume (cost-drivers)- vary in direct proportion to the level of production-decreases when less units are produced- variable in total costs, per-unit costs are constantFixed Costs costs that does not change in total despite changes in the related level of total activity or volume (cost-drivers)- will incur even if no units are produced- becomes progressively smaller on a per-unit basis as the cost driver increases - total costs remain same, per-unit cost changes with level of cost-driver- the more production, the lesser per-unit fixed costCost Terminology

Two categories of costs (applies to all sectors of economy service, merchandising, manufacturing) Capitalised Costs first recorded as an asset when incurred- presumed to provide future benefits to the company- costs to acquire motor vehicles, computer equipment- written off to those periods assumed to benefit from their incurrence

Revenue Costs- expenses of the accounting period when they are incurred- salaries paid to marketing personnel, monthly rent paid for offices

Service Sector- do not have tangible product at the end of accounting period- operating cost line items include costs from all areas of value chain (production of services, marketing etc) Operating costs: costs associated with generating revenuesMerchandising Sector- provide tangible products previously purchased in the same basic form from suppliers- merchandise not sold at the ending of accounting period is held as stockManufacturing Sector- provide tangible products that have been converted to a different form from that of the products purchased from suppliers- at the ending of accounting period, manufacturer has stock that can include direct materials, work in progress or finished goods Merchandising and manufacturing companies have holding of stock, hence they have stock-related costs (unlike service sectors) Stock-related costs (inventorial costs): - costs associated with purchase of goods for resale for merchandising- costs associated with acquisition and conversion of materials and other manufacturing inputs into goods for sale for manufacturing Operating costs- other than costs of goods sold, the costs associated with generating revenues

Manufacturing Sector Direct materials costs- acquisition costs of all materials that eventually become part of the cost object (either work-in-progress stock/finished goods stock)- easily identifiable with a specific job, contract, work order- varies directly with the volume of output- includes goods-in (inward delivery) charges, sales taxes and custom duties Direct manufacturing labour costs- include compensation of all manufacturing labour that is specifically identified with the cost object- may/may not vary directly with the volume of output- wages and fringe benefits paid to machine operators and assembly line workers Indirect manufacturing costs (manufacturing overhead costs)- manufacturing costs considered to be part of the cost object but cannot be traced in an economically feasible way- power, supplies, indirect materials, indirect labour, plant rent, plant insurance, property taxes, plant depreciation, salaries of managersPrime Costs All direct manufacturing/production costs- direct materials, direct labours, commission, piece-rate pay- to determine to the contribution margin of a product/service- to calculate the minimum price at which a product should be sold- does not include overheads costs, hence not advisable for long-term profitabilityConversion Costs- All manufacturing costs other than direct material costs- costs to transform materials into finished goodsAdministration Costs consists of all costs incurred in formulating the policy, directing the organization and controlling the operations - not related directly to manufacturing, selling and distribution, research and development, activity- includes accounts and personnel offices expenses, legal expenses, directors remuneration, audit fees etcExpenses all costs other than materials and labour cost

Direct expenses = Direct costs Direct Materials Costs Direct Labour Costsexcise duty (goods taxes), job process charges, royalty fees, hiring charges for machines, tools, equipment

Indirect expenses = Indirect costs Indirect Material costs Indirect Labour Costsrent and taxes of building, telephone expenses, repairs, insurance, depreciation of building, plant, machinery and furniture, cleaning expenses