Use with Business Accounting and Finance
Second Edition by Catherine Gowthorpe ISBN 1-84480-200-0
© 2005 Thomson Learning
Traditional costing techniques developed in
capital intensive industries, e.g. steelworks
Principal costs:
– Raw material
– Depreciation charges for physical assets
– Labour
Use with Business Accounting and Finance
Second Edition by Catherine Gowthorpe ISBN 1-84480-200-0
© 2005 Thomson Learning
Example: greetings card
Direct costs include the following:
• Direct materials: card, ink, envelopes etc.
• Direct labour: labour to operate printing and
cutting machinery, and to package
• Direct expense: design cost
Use with Business Accounting and Finance
Second Edition by Catherine Gowthorpe ISBN 1-84480-200-0
© 2005 Thomson Learning
Example: greetings card (continued)
Indirect costs include the following:
• Indirect production costs (overheads): factory
rental, supervision wages
• Other indirect costs (overheads)
administration costs, sales salaries
Use with Business Accounting and Finance
Second Edition by Catherine Gowthorpe ISBN 1-84480-200-0
© 2005 Thomson Learning
Use with Business Accounting and Finance
Second Edition by Catherine Gowthorpe ISBN 1-84480-200-0
© 2005 Thomson Learning
•
•
•
•
Absorption costing
Job costing
Product costing
Batch costing
NB: Cost unit
Use with Business Accounting and Finance
Second Edition by Catherine Gowthorpe ISBN 1-84480-200-0
© 2005 Thomson Learning
Cost of raw materials transferred into
production
• First In, First Out (FIFO)
• Last In, First Out (LIFO)
• Weighted average cost (AVCO)
Use with Business Accounting and Finance
Second Edition by Catherine Gowthorpe ISBN 1-84480-200-0
© 2005 Thomson Learning
Example: Potts Pilchard Limited
Opening stock: 25 units @ £1.50 each in February
20X3:
Use with Business Accounting and Finance
Second Edition by Catherine Gowthorpe ISBN 1-84480-200-0
© 2005 Thomson Learning
Use with Business Accounting and Finance
Second Edition by Catherine Gowthorpe ISBN 1-84480-200-0
© 2005 Thomson Learning
Use with Business Accounting and Finance
Second Edition by Catherine Gowthorpe ISBN 1-84480-200-0
© 2005 Thomson Learning
Use with Business Accounting and Finance
Second Edition by Catherine Gowthorpe ISBN 1-84480-200-0
© 2005 Thomson Learning
Use with Business Accounting and Finance
Second Edition by Catherine Gowthorpe ISBN 1-84480-200-0
© 2005 Thomson Learning
Complexities in costing
• Employee performs combination of indirect
and direct labour tasks
• Variation in payment methods
– overtime or unsocial hours payments
– piece rates
– bonuses
• Idle or non-productive time
Use with Business Accounting and Finance
Second Edition by Catherine Gowthorpe ISBN 1-84480-200-0
© 2005 Thomson Learning
Allocation of overheads to cost centres where precise information is available
Allocation of overheads to cost centres where costs cannot be allocated they must be
apportioned
e.g. apportionment of factory rent amongst cost centres
based on sq.metres occupied
Use with Business Accounting and Finance
Second Edition by Catherine Gowthorpe ISBN 1-84480-200-0
© 2005 Thomson Learning
Common approaches to
apportionment
Use with Business Accounting and Finance
Second Edition by Catherine Gowthorpe ISBN 1-84480-200-0
© 2005 Thomson Learning
Apportionment - example
Cost centres:
– metal machining (6000 sq.metres)
– brush fitting (2000 sq.metres)
– painting and finishing (2000 sq.metres)
Total square metres = 10 000
Factory rental cost = £33 970 to be apportioned
on the basis of sq.metres of floor space
Use with Business Accounting and Finance
Second Edition by Catherine Gowthorpe ISBN 1-84480-200-0
© 2005 Thomson Learning
Apportionment - example
Metal machining:
Brush fitting:
Paint and finishing:
Use with Business Accounting and Finance
Second Edition by Catherine Gowthorpe ISBN 1-84480-200-0
© 2005 Thomson Learning
A method of transferring overhead costs to
cost units
Example:
Production = 5400 machines
Production overhead = £142 950
Production overhead attributable to each machine =
Use with Business Accounting and Finance
Second Edition by Catherine Gowthorpe ISBN 1-84480-200-0
© 2005 Thomson Learning
Methods of calculating overhead absorption rates:
•
•
•
•
•
Unit of production
Machine hour
Labour hour
Percentage of direct labour
Percentage of direct materials
Use with Business Accounting and Finance
Second Edition by Catherine Gowthorpe ISBN 1-84480-200-0
© 2005 Thomson Learning
Basic principle: cost units should bear the cost
of the activities they cause. Costs are ‘driven’
by activities that take place in the business
environment, e.g:
Use with Business Accounting and Finance
Second Edition by Catherine Gowthorpe ISBN 1-84480-200-0
© 2005 Thomson Learning
Example:
Sallis Weller Limited - indirect production overheads =
£113 000
Direct labour hours for the month are 5000
Overhead absorption rate =
Use with Business Accounting and Finance
Second Edition by Catherine Gowthorpe ISBN 1-84480-200-0
© 2005 Thomson Learning
Example:
(using traditional overhead absorption)
Use with Business Accounting and Finance
Second Edition by Catherine Gowthorpe ISBN 1-84480-200-0
© 2005 Thomson Learning
Example:
(identifying cost drivers)
Use with Business Accounting and Finance
Second Edition by Catherine Gowthorpe ISBN 1-84480-200-0
© 2005 Thomson Learning
Example:
Use with Business Accounting and Finance
Second Edition by Catherine Gowthorpe ISBN 1-84480-200-0
© 2005 Thomson Learning
Example:
Use with Business Accounting and Finance
Second Edition by Catherine Gowthorpe ISBN 1-84480-200-0
© 2005 Thomson Learning
Example: (comparison of traditional/ABC)
Use with Business Accounting and Finance
Second Edition by Catherine Gowthorpe ISBN 1-84480-200-0
© 2005 Thomson Learning
FOR:
AGAINST:
ABC improves quality
of information so
results in better
planning and control
of activities
ABC is a system of
great complexity
and is costly to
implement
Use with Business Accounting and Finance
Second Edition by Catherine Gowthorpe ISBN 1-84480-200-0
© 2005 Thomson Learning