understanding costing session 1

8/11/2019 Understanding Costing Session 1

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Look after the centsAnd the dollars will look after themselves


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What is Costing?Costing is the process of :

Estimating the total resourceinvestment

required to merchandise,

produce

and market a product

Backbone of a firms success

Is managed by

successful controlling of costs aided by precise information

and utilization of the information.


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Costing and Cost accounting Costing : Techniques and processes of ascertaining costs.

Principles/Rules are applied for ascertaining costs of productsmanufacturedor service rendered .

Cost accounting : Determination and analysis of costs ofdepartments, processes, jobs, products, territories, orders etc

Need not be restricted for profit organizations


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Uses To control costs

Make revenue decisions-a) Pricing

b) Product mix

c) Profit volume decisions


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Uses Identify Profitable/ Non profitable operations

a) Pricing of new product

b) Eliminating seasonality

c) Expand/contract operationsd) Replacing machinery or equipment

e) Dropping a product

f) Distribution policies

g) Production methods


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Uses Formulation of budgets/standards and their execution

Managerial decision making and planning- Short term and Long term.


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Costing in the manufacturing

process Inputs( Factors of production) Outputs

RawMaterials

NaturalResources

HumanResources

Capital

Conversion

Process

Goods

Services


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Cost accounting and Management

accountingCost accounting:

Collecting, classifying, calculating , organizing, reporting and usingcosts

Used for decision making in resource allocation

Management accounting Focuses both on Historical and estimated data For ongoing operations and Long range planningIncludes costing but ALSO considers the preparation of other management

information-

a) Budgetsb) Forecastsc) Capital requirementsd) Evaluatione) Financial statisticsf) Profitability


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Financial accounting Financial accounting

Recording of financial information ( Transactions/events of a financialcharacter) for the production of periodic financial accounts.

Meets the needs of Investors, Creditors and external usersa) Revenue statement( Profit and loss)

b) Balance sheet

c) Taxation VAT, Corporation Tax, octroi etc


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Cost accounting and Financial

accountingCost accounting Financial accounting

Used by External users : Creditors,Stakeholders, analysts etc

Used by the management

Uses double entry system Single entry : Segmented and collatedinformation

Needs to use accounting principles Can use any principle which generatesuseful information.

UOM is monetary UOM can be money, labor hours,machine hours, Product units, SAMs

Fixed time period Need based


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Building blocks of cost calculation CAPITAL

Working capital is the money and assets (excluding fixed assets i.e.buildings, machinery) that a business uses to finance the day-to-dayoperations that produce the goods or services supplied to customers

Current assets: Debtors, Cash, stock

Net working capital :

Current assetsDebtors, Cash( a/c receivable) and Stock ( Inventory)

(less)

Current Liabilities:

Creditors, Loans and Tax =Net Working Capital


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Building blocks of cost calculation Identify which among these can be working capital

Stock :

Raw materialsWIP

Finished stock

Debtors

Cash

In hand

In the bank


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Building blocks of cost calculation EXPENDITURES

Capital expenditure : Yield benefit over a long period of time

Operating expenditure : Yield benefit in the immediate period

Identify which amongst these are Capital and Operating expenditure foran apparel concern

Washing unit

Softener for washing

Pintable

Cutting machine

Trade mark


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Building blocks of cost calculation DEPRECIATION

a) The cost of using the fixed assetsof the business for the periodcovered by the cost statement

b) A non-cash expense that reduces

the value of an asset as a result ofwear and tear, age, or

obsolescenceCapital expenditure cost is spread over

multiple periods and deducted

as an expense in each period.Identify areas of Depreciation in an

apparel factory


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Methods Job costing

Production per specific order orspecifications.

Each job is separate and distinct

from the others Batch costing

Contract/Terminal costing

Multiple/Composite costing

Process costing

Manufacture is donesimultaneously.

Costs cannot be traced easily to

specific units. Averaged fornumber of units manufactured

Unit/Single output

Operating costing

Operation costing


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Identify Building Job

Automobile Process

RMG Batch Cab service Operating

Road contractor Job


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Requirement Costing is required for

a) Determining the producability of a design within an established pricerange

b) To determine the profit potential of a designc) To determine if a style can be added to a line on the production f loor.

d) Establish a base for the selling price

e) Bid on Contracts

f) Analyze relative profitability of various products and services

g) Measure performance of subunits within the organization


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understanding costing session 1

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