Accounting for the non accountant - unit 3

1. Measuring Cost
• The aim of a costing system is to provide
information about the operating costs of
activities within a firm. This will help
management in the following ways:
• Establishing the cost of a product for the
future, based on costs incurred in the
past, or forecast what costs are likely to be
in the future
• Outlines the profitability of the service or
product that the company is selling.
• Compare actual costs with estimated
costs. By doing this a firm can see if it’s
costs are under control.
• Make better informed decisions in regards
to setting prices for the products or
service it provides.
3. Costing

2. • Direct costs and Indirect costs (Overheads)
• Costs can be summarised as the sum of direct
costs and indirect costs. Firms use costing
systems to establish their profitability.
• Cost = Variable costs + Fixed costs
• Costs which are partly-fixed and partly-
variable can be segregated into their fixed cost
and variable cost elements using the high-low
method.
3.1 Types of Cost

3. 3.2 Overheads

4. Apportionment
• This is where indirect costs are spread (apportioned) fairly
between different areas of the organization
• Overhead absorption is the process where costs of
organizations are added to the unit, process or job costs. This
is sometimes known as overheard recovery.
Absorption
• Absorption of overheads occurs because the predetermined
overheard absorption rates are based on forecasts.
• Absorption costing is most often used for routine profit
reporting and must be used for financial accounting purposes.
• Predetermined overheard absorption rates are normally used
based on budgeted figures.
Marginal costing
• Marginal costing provides better management information
for planning and decision making.
• Marginal cost is the cost of producing one more unit of a
product or service.
• Contribution, is the difference between Sales revenue (Price x
Quantity) and the marginal or variable cost of sales.
• In marginal costing, fixed production costs are treated as
period costs and are written off when incurred.
3.3 Apportionment , Absorption & Marginal costing