total cost / service costs - ibrahim sameer total cost of making a product or providing a service...

Ibrahim Sameer (MBA - Specialized in Finance, B.Com – Specialized in Accounting & Marketing)

Total Cost / Service Costs The total cost of making a product or providing a

service consists of the following:

Cost of materials

Cost of the wages and salaries (labour costs)

Cost of other expenses (rent and rates, electricity bill,

depreciation)

Direct Cost & Indirect Cost A direct cost is a cost that can be traced in full to the

product, service, or department that is being costed.

An indirect cost (or overhead) is a cost that is

incurred in the course of making a product, providing

a service or running a department, but which cannot

be traced directly and in full to the product,

service or department.

Examples of Direct Cost & Indirect Cost

Direct Cost Indirect Cost

Consultant fee in a firm of management consultant

OT Premium

Royalty fees paid to the inventor of the product

A store assistant in a factory store

Plasterers in a construction company Forklift truck drivers in the stores of an engineering company

Expenses paid by assembly workers in a manufacturing company

Maintenance workers in a shoe factory

Bricklayers in a house building company

Machinists in a factory producing clothes

Direct Cost & Indirect Cost Analysis of total cost

Direct Cost & Indirect Cost Direct Materials

Direct materials is all material becoming part of the

product.

For eg: component part, part finished product,

primary packing materials.

Direct Cost & Indirect Cost Direct Labour

Direct wages are all wages paid for labour expended on

work on the product itself.

Direct Cost & Indirect Cost Direct Expenses

Direct expenses are any expenses which are incurred

on a specific product other than direct material cost

and direct wages. It is also referred as chargeable

expenses.

For eg: the hire of tool or equipment for particular job,

maintenance costs of tool.

Direct Cost & Indirect Cost Production overhead

Production OH include all indirect material costs,

indirect wages and indirect expenses incurred in

the factory from receipt of the order until its

completion.

Functional Costs Classification by Function

Classification by function involves classifying costs

as production / manufacturing costs, administration

costs or marketing / selling and distribution cost.

Functional Costs Functional cost Includes:

Production cost

Administration cost

Selling cost

Distribution costs

Fixed Costs & Variable Costs 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.

Eg: Rent

Fixed Costs & Variable Costs A variable cost is a cost which tends to vary with level

of activity.

Eg: Direct materials, sales commission

Fixed Costs & Variable Costs Many items of expenditure are part fixed and part

variable and hence are termed as semi fixed or semi

variable costs.

Eg: telephone call charges

Production & Non Production Cost For the preparation of financial statements, costs are

often classified as production costs and non

production costs.

Production & Non Production Cost Production costs are all the costs involved in the

manufacture of goods. In the case of manufactured

goods, these costs consist of direct material, direct

labour and manufacturing overheads.

Production & Non Production Cost Non - Production costs are taken directly to the

income statement as expenses in the period in

which they are incurred; such cost consist of selling

and administrative expenses.

Controllable cost & Period cot Controllable cost

Controllable costs are items of expenditure which can

be directly influenced by a given manager within a

given time span. OR

A cost which can be influenced by its budget holder.

Controllable cost & Period cot Period cost

Period costs is charged against the sales for the

period. It is not carried forward in inventory to a

future period. OR

A cost that relates to a time period which is deducted

as expenses for the period and is not included in the

inventory valuation.

Cost Codes Once costs have been classified, a coding system can

be applied to make it easier to manage the cost

data, both in manual systems and in computerized

systems.

Cost Codes Feature of a good coding system

The code must be easy to use and communicate.

Each item should have unique code.

The coding system must allow for expansion.

The coding system should be brief.

The likelihood of error going undetected should be

minimized.

Types of Codes Sequential (or progressive) codes

Numbers are given to items in ordinary numeral

sequence, so there is no obvious connection between

an item and its code. For example

000042 42cm nail

000043 office stapler

000044 hand wash

Types of Codes Block (or group classification) codes

These are an improvement on simple sequence codes,

in that digit (often the first one) indicates the

classification of an item. For example

4NNNNN Nails

5NNNNN Screws

6NNNNN Bolts

Types of Codes Faceted codes

These are a refinement of block codes, in that each

digit of the code gives information about an item. For

example

Types of Codes The 1st digit: 1 Nails

2 Screws

3 Bolts

The 2nd digit: 1 Steel

2 Brass

3 Copper

Types of Codes The 3rd digit: 1 50mm

2 60mm

3 75mm

A 60mm steel screw would have a code of 212

Types of Codes Mnemonic codes

Under this type of coding the code means something,

it may be an abbreviation of the object being coded.

Most of the time airport use this type of coding. For

example

SIN – Singapore

LAX – Los Angeles

Types of Codes Hierarchical codes

This is a type of faceted code where each digit

represents a classification, and each digit further to the

right represents a smaller subset than those to the left.

For example

3 = Screws

31 = flat headed screws

Advantages of Coding A code usually briefer than a description, thereby

saving clerical time in a manual system & storage space

in a computerized system.

A code is more precise than a description and

therefore reduce ambiguity.

Coding facilitates data processing.

Cost unit, Cost object & Responsibility centres

Cost centres

Cost centres are collecting places for costs before

they are further analysed. Cost are further analysed

into cost units once they have been traced to cost

centres.

Cost centres may include a department, a machine, a

project.


Cost units

A cost unit is a unit of product or service to which

cost can be related. The cost unit is the basic control

unit for costing purpose.

Eg: room (in hotel), Barrel (in the brewing industry)


Cost objects

If the user of management information wish to know

the cost of something, this something is called a cost

object.

Eg: the cost of product, the cost of service, the cost of

operating a department.


Profit centres

A profit centre is any section of an organization to

which both revenues and costs are assigned, so that

the profitability of the section may be measured.

Remember that there can be several cost centres

within a profit centre.


Some examples of profit centre:

A sales division selling products to customers.

A service division providing after sales service.

Individual shop in a retail chain.

Local branches in a regional or nationwide

distribution business.

A geographical region. Eg: a country


Revenue centre

Revenue centres are similar to cost centres and profit

centres but are accountable for revenue only.

Revenue centre managers should normally have

control over how revenues are raised.


Investment centre

An investment centre is a profit centre whose

performance is measured by its return on capital

employed.


Responsibility centre

A responsibility centre is a function or department of

an organization that is headed by a manager who has

direct responsibility for its performance. (OR)

It is an organization unit for which a manager is

made responsible.

total cost / service costs - ibrahim sameer total cost of making a product or providing a service...

Documents