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CAT NI T E R A INTERMEDIATE C T PAPER 4 I ACCOUNTING FOR COSTS V E T E BPP is the official provider of training materials for the ACCA's CAT qualification. This X Interactive Text forms part of a suite of learning tools, which also includes CD-ROMs for tuition and computer based assessment, and the innovative, internet-based Learn T Online. This text has been specifically written to the current syllabus and Teaching Guide. • Clear language and presentation ••ThiNganHang.comtechniquesPlenty of questions, examples and quizzes to demonstrate and practiseA question and answer bank prepared by BPP Learning Media authors FOR EXAMS IN DECEMBER 2008 AND JUNE 2009 ThiNganHang.com
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First edition 2003 Sixth edition June 2008 ISBN 9780 7517 4823 9 (Previous ISBN 9780 7517 3571 0) British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library All our rights reserved. No part of this publication may be Published by reproduced, stored in a retrieval system or transmitted, in BPP Learning Media Ltd any form or by any means, electronic, mechanical, BPP House, Aldine Place photocopying, recording or otherwise, without the prior London W12 8AA written permission of BPP Learning Media Ltd. www.bpp.com/learningmedia We are grateful to the Association of Chartered Certified Accountants for permission to reproduce past Printed in Great Britain by examination questions. The suggested solutions in the WM Print exam answer bank have been prepared by BPP Learning 45-47 Frederick Street Media Ltd, unless where otherwise stated. Walsall West Midlands WS2 9NEThiNganHang.com Your learning materials, published by BPP © Learning Media Ltd, are printed on paper BPP Learning Media Ltd sourced from sustainable, managed forests. 2008 ii ThiNganHang.com
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Contents Page Introduction How to use this Interactive Text v Approach to examining the syllabus vi Analysis of past papers vi The computer based examination vii Tackling multiple choice questions viii Part A Introduction to accounting for costs 1 Management information 3 2 The role of information technology 23 3 Cost classification 33 4 Cost behaviour 47 Part B Elements of cost 5 Materials 61 6 Labour 89 7 Expenses 111 8 Overheads and absorption costing 123 9 Marginal costing and absorption costing 143 10 Cost bookkeeping 157 Part C Product and service costs 11 Job, batch and service costing 179 12 Process costing 195 Part D Decision making 13 Cost-volume-profit (CVP) analysis 231 14 Decision making 249 15 Capital investment appraisal 265 Appendix: Mathematical tables 289 Exam question bank 293 Exam answer bank 305 List of key terms and index 321 ThiNganHang.comReview form and free prize draw Contents iii ThiNganHang.com
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How to Use this Interactive Text Aim of this Interactive Text To provide the knowledge and practice to help you succeed in the examination for Paper 4 Accounting for costs To pass the examination you need a thorough understanding in all areas covered by the syllabus and teaching guide. Recommended approach (a) To pass you need to be able to answer questions on everything specified by the syllabus and teaching guide. Read the text very carefully and do not skip any of it. (b) Learning is an active process. Do all the questions as you work through the text so you can be sure you really understand what you have read. (c) After you have covered the material in the Interactive Text, work through the Question Bank, checking your answers carefully against the Answer Bank. (d) Before you take the exam, check that you still remember the material using the following quick revision plan. (i) Read through the chapter topic list at the beginning of each chapter. Are there any gaps in your knowledge? If so, study the section again. (ii) Read and learn the key terms. (iii) Look at the exam alerts. These show the ways in which topics might be examined. (iv) Read the chapter roundups, which are a summary of the fast forwards in each chapter. (v) Do the quick quizzes again. If you know what you're doing, they shouldn't take long. This approach is only a suggestion. You or your college may well adapt it to suit your needs. Remember this is a practical course. (a) Try to relate the material to your experience in the workplace or any other work experience you may have had. (b) Try to make as many links as you can to other papers at the Introductory and Intermediate levels. ThiNganHang.com Introduction v ThiNganHang.com
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Approach to examining the syllabus Paper 4 is a two-hour paper. It can be taken as a written paper or a computer based examination. The questions in the computer based examination are objective test questions – multiple choice, number entry and multiple response. (See page vii for frequently asked questions about computer based examinations.) The written examination consists of two sections, structured as follows: Number of marks Section A: 20 compulsory multiple choice questions of two marks each 40 Section B Compulsory written questions of between 10 and 20 marks each 60 Total 100 Analysis of past papers Section A of your exam has 20 MCQs covering the whole syllabus. Section B questions will require more in-depth calculation and explanations. Topics examined to date are: Topic Dec June Dec June Dec Jun Dec June 2007 2007 2006 2006 2005 2005 2004 2004 Cost classification and behaviour • • • Inventory control • • • Labour costs • • Overhead costing • • • • • • Job, batch and service costing • • • • Process costing • • • • CVP • • • • • Decision making • Capital investment appraisal • • • • Questions and answers for all of these sittings can be downloaded from the ACCA website, together with examiner’s comments on the paper. ThiNganHang.com vi Introduction ThiNganHang.com
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The Computer Based Examination The ACCA has introduced a computer based examination (CBE) for CAT Papers 1–4 (in addition to the conventional paper based examination for papers 3 and 4). Computer based examinations must be taken at an ACCA CBE Licensed Centre. How does CBE work? • Questions are displayed on a monitor • Candidates enter their answer directly onto the computer • Candidates have two hours to complete the examination • When the candidate has completed their examination, the computer automatically marks the file containing the candidate's answers • Candidates are provided with a certificate showing their results before leaving the examination room • The CBE Licensed Centre uploads the results to the ACCA (as proof of the candidate's performance) within 48 hours Benefits • Flexibility as a CBE can be sat at any time. • Resits can also be taken at any time and there is no restriction on the number of times a candidate can sit a CBE. • Instant feedback as the computer displays the results at the end of the CBE. • Results are notified to ACCA within 48 hours. • Extended closing date periods (see ACCA website for further information) CBE question types • Multiple choice – choose one answer from four options • Multiple response 1 – select more than one response by clicking the appropriate tick boxes • Multiple response 2 – select a response to a number of related part questions by choosing one option from a number of drop down menus • Number entry – key in a numerical response to a question CAT CBE ThiNganHang.comYou will have two hours in which to answer a number of questions, which are worth a total of 100 marks. See the ACCA website for a demonstration and up to date information (www.acca.org.uk/colleges/cbe_demo). Introduction vii ThiNganHang.com
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Tackling Multiple Choice Questions MCQ's are now part of all CAT exams. Papers 1 and 2 are examined by CBE, Papers 3 and 4 can be taken by CBE or by a written paper which is 40% MCQs. Paper 5 is now 50% MCQ's and Papers 6-10 are 20% MCQs. All MCQs carry 2 marks. The MCQs in your exam contain four possible answers. You have to choose the option that best answers the question. The three incorrect options are called distracters. There is a skill in answering MCQs quickly and correctly. By practising MCQs you can develop this skill, giving you a better chance of passing the exam. You may wish to follow the approach outlined below, or you may prefer to adapt it. Step 1 Skim read all the MCQs and identify what appear to be the easier questions. Step 2 Attempt each question – starting with the easier questions identified in Step 1. Read the question thoroughly. You may prefer to work out the answer before looking at the options, or you may prefer to look at the options at the beginning. Adopt the method that works best for you. Step 3 Read the four options and see if one matches your own answer. Be careful with numerical questions as the distracters are designed to match answers that incorporate common errors. Check that your calculation is correct. Have you followed the requirement exactly? Have you included every stage of the calculation? Step 4 You may find that none of the options matches your answer. • Re-read the question to ensure that you understand it and are answering the requirement • Eliminate any obviously wrong answers • Consider which of the remaining answers is the most likely to be correct and select the option Step 5 If you are still unsure make a note and continue to the next question Step 6 Revisit unanswered questions. When you come back to a question after a break you often find you are able to answer it correctly straight away. If you are still unsure have a guess. You are not penalised for incorrect answers, so never leave a question unanswered! After extensive practice and revision of MCQs, you may find that you recognise a question when you sit the exam. Be aware that the detail and/or requirement may be different. If the question seems familiar read the requirement and options carefully – do not assume that it is identical. ThiNganHang.com viii Introduction ThiNganHang.com
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Management information Chapter topic list 1 Management information 2 Recording management information 3 The role of the accounting technician 4 Costs in outline 5 Costs in detail 6 Product costing 7 Cost codes 8 Presentation of management information ThiNganHang.com 3 ThiNganHang.com
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Study guide reference Syllabus reference 1 (a) Discuss the purpose of management information: planning, control and decision 1b(i) making (b) Describe the features of useful management information 1(b)(i)/1(c)(ii) (c) Discuss the nature, source and importance of both financial and non-financial 1(a)(i) information for managers (f) Discuss the role of the accounting technician 1(b)(iii) (g) Present management information in suitable formats according to purpose 1(b)(ii) 2 (a) Explain the relationship between the cost/management accounting system and 1(c) the financial accounting/management information systems (b) Describe the process of accounting for input costs and relating them to work 1(c) done (c) Identify the documentation required, and the flow of documentation, for different 1(c) cost accounting transactions (d) Explain the use of codes in categorising and processing transactions, and the 1(c) importance of correct coding (e) Explain and illustrate the concept of cost units 1(c) (f) Describe the different methods of costing final outputs and their appropriateness 1(c) to different types of business organisation 1 Management information FAST FORWARD Information is data that has been processed to make it meaningful. 1.1 Information Key terms • Data is the raw material for data processing. Data relates to facts, events and transactions. • Information is data that has been processed in such a way as to be meaningful to the person who receives it. It is anything that is communicated. Information is sometimes referred to as processed data. The terms 'information' and 'data' are often used interchangeably. It is important to understand the difference between these two terms. Researchers who conduct market research surveys might ask members of the public to complete questionnaires about a product or a service. These completed questionnaires are data; they are processed and analysed in order to prepare a report on the survey. This resulting report is information. ThiNganHang.comAs you probably know, managers (including your own manager!) are always asking for reports, analyses,schedules of costs and so on. Well, broadly speaking, these reports, analyses and schedules are part ofwhat is known as management information. 1.2 Features of useful management information FAST FORWARD Good information should be relevant, complete, accurate and clear. It should inspire confidence, it should be appropriately communicated, its volume should be manageable, it should be timely and its cost should be less than the benefits it provides. 4 1: Management information⏐ Part A Introduction to accounting for costs ThiNganHang.com
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Let us look at those qualities in more detail. (a) Relevance. Management information must be relevant to the purpose for which a manager wants to use it. In practice, far too many reports fail to 'keep to the point' and contain irrelevant paragraphs which only annoy the managers reading them. (b) Completeness. An information user should have all the information he needs to do his job properly. If he does not have a complete picture of the situation, he might well make bad decisions. (c) Accuracy. Management information should obviously be accurate because using incorrect information could have serious and damaging consequences. However, management information should only be accurate enough for its purpose and there is no need to go into unnecessary detail for pointless accuracy. (d) Clarity. Management information must be clear to the user. If the user does not understand it properly he cannot use it properly. Lack of clarity is one of the causes of a breakdown in communication. It is therefore important to choose the most appropriate presentation medium or channel of communication. (e) Confidence. Management information must be trusted by the managers who are expected to use it. However not all management information is certain. Some information has to be certain, especially operating information, for example, related to a production process. Strategic information, especially relating to the environment, is uncertain. However, if the assumptions underlying it are clearly stated, this might enhance the confidence with which the management information is perceived. (f) Communication. Within any organisation, individuals are given the authority to do certain tasks, and they must be given the information they need to do them. An office manager might be made responsible for controlling expenditures in his office, and given a budget expenditure limit for the year. As the year progresses, he might try to keep expenditure in check but unless he is told throughout the year what is his current total expenditure to date, he will find it difficult to judge whether he is keeping within budget or not. (g) Volume. There are physical and mental limitations to what a person can read, absorb and understand properly before taking action. An enormous mountain of management information, even if it is all relevant, cannot be handled. Reports to management must therefore be clear and concise and in many systems, control action works basically on the 'exception' principle. (h) Timing. Management information which is not available until after a decision is made will be useful only for comparisons and longer-term control, and may serve no purpose even then. Management information prepared too frequently can be a serious disadvantage. If, for example, a decision is taken at a monthly meeting about a certain aspect of a company's operations, management information to make the decision is only required once a month, and weekly reports would be a time-consuming waste of effort. (i) Channel of communication. There are occasions when using one particular method of communication will be better than others. For example, job vacancies should be announced in a medium where they will be brought to the attention of the people most likely to be interested. The channel of communication might be the company's in-house journal, a national or local newspaper, a professional magazine, a job centre or school careers office. Some internal memoranda may be ThiNganHang.com(j) better sent by 'electronic mail'. Some information is best communicated informally by telephone orword-of-mouth, whereas other information ought to be formally communicated in writing orfigures.Cost. Management information should have some value, otherwise it would not be worth the cost of collecting and filing it. The benefits obtainable from the management information must also exceed the costs of acquiring it, and whenever management is trying to decide whether or not to produce management information for a particular purpose (for example whether to computerise an operation or to build a financial planning model) a cost/benefit study ought to be made. Part A Introduction to accounting for costs ⏐ 1: Management information 5 ThiNganHang.com
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1.3 Purpose of management information The successful management of any organisation depends on information. For example, consider the following problems and what management information would be useful in solving these problems. Problem 1 A company wishes to launch a new product. The company's pricing policy is to set the price at total cost + 20%. What should the price of the product be? MANAGEMENT NEED INFORMATION ABOUT THE TOTAL COST OF THE PRODUCT Problem 2 A company's bottle making machine has a fault and the company has to decide whether to repair the machine, to buy a new machine or to hire a machine. If the company aims to minimise costs, which decision should management take? MANAGEMENT NEED COST INFORMATION RELATING TO THE FOLLOWING DECISIONS. • REPAIRING THE CURRENT MACHINE • BUYING A NEW MACHINE • HIRING A SIMILAR MACHINE The examples above show that information is a vital part of the following processes. • Planning • Control • Decision making FAST FORWARD • Planning involves establishing objectives for the company and developing strategies in order to achieve those objectives. • Control is the action of monitoring something in order to keep it on course. 1.4 Planning Planning involves the following. • Establishing objectives for the company • Developing strategies in order to achieve the company's objectives An objective is the aim or goal of an organisation. A strategy is a possible course of action that might enable an organisation to achieve its objectives. ThiNganHang.comThe objectives of an organisation might include one or more of the following. • Maximise profits • Maximise shareholder value • Minimise costs • Maximise revenue • Increase market share Remember that the type of activity undertaken by an organisation will have an impact on its objectives. 1.5 Control Control is the action of monitoring something in order to keep it on course. Most companies will set out a plan for a future period (for example, a budget) and then compare the actual results during the period with 6 1: Management information⏐ Part A Introduction to accounting for costs ThiNganHang.com
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the budget. Any deviations from the budget can then be identified and corrected as necessary. Such deviations are known as variances (you studied variances at Introductory level in Paper 2). You will go on to study variances and variance analysis in detail at Final level in Paper 7, Planning, Control and Performance Management. 1.6 Decision making Managers at all levels within an organisation take decisions. Decision making always involves a choice between alternatives and it is the role of the accounting technician to provide information so that management can reach an informed decision. It is therefore useful if accounting technicians understand the decision-making process so that they can supply the appropriate type of management information. ThiNganHang.com Part A Introduction to accounting for costs ⏐ 1: Management information 7 ThiNganHang.com
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1.7 Internal sources of management information The main internal sources of management information within an organisation include the following. • Financial accounting records • Personnel records • Production department records • Detailed time records (especially in service organisations) There is no need for us to give a detailed description of the constituents of the financial accounting records. You are probably familiar with the idea of a system of sales ledgers and purchase ledgers, general ledgers, cash books and so on. These records provide a history of an organisation's monetary transactions. Some of this information is of great value outside the accounts department, for example sales information for the marketing function. You will also be aware that to maintain the integrity of its financial accounting records, an organisation of any size will have systems for and controls over transactions. These also give rise to valuable information. An inventory control system is the classic example. Besides actually recording the monetary value of purchases and inventory in hand for external financial reporting purposes, the system will include purchase orders, goods received notes, goods returned notes and so on, and these can be analysed to provide management information about speed of delivery, say, or the quality of supplies. Much of the information that is not strictly part of the financial accounting records is in fact closely tied in to the accounting system. (a) Information relating to personnel will be linked to the payroll system. Additional information may be obtained from this source if, say, a project is being costed and it is necessary to ascertain the availability and rate of pay of different levels of staff, or the need for and cost of recruiting staff from outside the organisation. (b) Much information will be produced by a production department about machine capacity, fuel consumption, movement of people, materials, and work in progress, set up times, maintenance requirements and so on. A large part of the traditional work of cost accounting involves ascribing costs to the physical information produced by this source. (c) Many service businesses – notably accountants and solicitors - need to keep detailed records of the time spent on various activities, both to justify fees to clients and to assess the efficiency of operations. 1.8 External sources of management information We hardly need say that an organisation's files are also full of invoices, letters, advertisements and so on received from customers and suppliers. These documents provide information from an external source. There are many occasions when an active search outside the organisation is necessary. (a) A primary source of information is, as the term implies, as close as you can get to the origin of an item of information: the eyewitness to an event, the place in question, the document under ThiNganHang.com(b) Ascrutiny.verbal or written reports by someone else.secondary source, again logically enough, provides 'second-hand' information: books, articles, 1.9 Financial and non-financial information for management Most organisations require the following types of information for management. • Financial • Non-financial • A combination of financial and non-financial information 8 1: Management information⏐ Part A Introduction to accounting for costs ThiNganHang.com
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Suppose that the management of ABC Co have decided to provide a canteen for their employees. (a) The financial information required by management might include the following • Canteen staff costs • Costs of subsidising meals • Capital costs • Costs of heat and light (b) The non-financial information might include the following. • Management comment on the effect on employee morale of the provision of canteen facilities • Details of the number of meals served each day • Meter readings for gas and electricity • Attendance records for canteen employees ABC Co could now combine financial and non-financial information to calculate the average cost to the company of each meal served, thereby enabling them to predict total costs depending on the number of employees in the work force. Most people probably consider that management accounting is only concerned with financial information and that people do not matter. This is, nowadays, a long way from the truth. For example, managers of business organisations need to know whether employee morale has increased due to introducing a canteen, whether the bread from particular suppliers is fresh and the reason why the canteen staff are demanding a new dishwasher. This type of non-financial information will play its part in planning, controlling and decision making and is therefore just as important to management as financial information is. Non-financial information must therefore be monitored as carefully, recorded as accurately and taken into account as fully as financial information. There is little point in a careful and accurate recording of total canteen costs if the recording of the information on the number of meals eaten in the canteen is uncontrolled and therefore produces inaccurate information. While management accounting is mainly concerned with the provision of financial information to aid planning, control and decision making, the accounting technician cannot ignore any non-financial influences which might be present. 2 Recording management information FAST FORWARD Financial accounts are prepared for individuals external to an organisation whereas management accounts are prepared for internal managers of an organisation. There are a number of differences between financial accounts and management accounts – make sure that you know what they are. 2.1 Financial accounts and management accounts ThiNganHang.comManagement information provides a common source from which is drawn information for two groups ofpeople.(a) Financial accounts are prepared for individuals external to an organisation. • Shareholders • Customers • Suppliers • Tax authorities Part A Introduction to accounting for costs ⏐ 1: Management information 9 ThiNganHang.com
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(b) Management accounts are prepared for internal managers of an organisation. Financial accounts Management accounts Financial accounts detail the performance of an Management accounts are used to aid organisation over a defined period and the state of management record, plan and control the affairs at the end of that period. organisation's activities and to help the decision-making process. Limited companies must, by law, prepare financial There is no legal requirement to prepare accounts. management accounts. The format of published financial accounts is The format of management accounts is entirely determined by law (mainly the Companies Acts) and by at management discretion: no strict rules Financial Reporting Standards. In principle the accounts govern the way they are prepared or presented. of different organisations can therefore be easily Each organisation can devise its own compared. management accounting system and format of reports. Financial accounts concentrate on the business as a Management accounts can focus on specific whole, aggregating revenues and costs from different areas of an organisation's activities. operations, and are an end in themselves. Information may be produced to aid a decision rather than to be an end product of a decision. Most financial accounting information is of a monetary Management accounts incorporate non- nature. monetary measures. Management may need to know, for example, tons of aluminium produced, monthly machine hours, or miles travelled by salesmen. Financial accounts present an essentially historic picture Management accounts are both an historical of past operations. record and a future planning tool. 2.2 Cost accounts Cost accounting and management accounting are terms which are often used interchangeably. It is not correct to do so. Cost accounting is concerned with the following. • Preparing statements (eg budgets, costing) • Cost data collection • Applying costs to inventory, products and services Management accounting is concerned with the following. • Using financial data and communicating it as information to users Cost accounting is part of management accounting. Cost accounting provides a bank of data for the management accountant to use. Cost accounts aim to establish the following. ThiNganHang.com(a)(b)(c) WhatTheThe costcostrevenuesof goods produced or services provided.of a department or work section.have been. (d) The profitability of a product, a service, a department, or the organisation in total. (e) Selling prices with some regard for the costs of sale. (f) The value of inventories of goods (raw materials, work in progress, finished goods) that are still held in store at the end of a period, thereby aiding the preparation of a balance sheet of the company's assets and liabilities. (g) Future costs of goods and services (costing is an integral part of budgeting (planning) for the future). 10 1: Management information⏐ Part A Introduction to accounting for costs ThiNganHang.com
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(h) How actual costs compare with budgeted costs (If an organisation plans for its revenues and costs to be a certain amount, but they actually turn out differently, the differences can be measured and reported. Management can use these reports as a guide to whether corrective action (or 'control' action) is needed to sort out a problem revealed by these differences between budgeted and actual results. This system of control is often referred to as budgetary control). (i) What information management needs in order to make sensible decisions about profits and costs. It would be wrong to suppose that cost accounting systems are restricted to manufacturing operations, although they are probably more fully developed in this area of work. Service industries, government departments and welfare activities can all make use of cost accounting information. Within a manufacturing organisation, the cost accounting system should be applied not only to manufacturing but also to administration, selling and distribution, research and development and all other departments. 3 The role of the accounting technician You have now had a brief introduction to management information and cost accounting. Let us now consider the role of the accounting technician in a cost accounting system. Remember that the accounting technician will have access to a large amount of information which is all recorded in the cost accounting records. With so much information at his fingertips, it is inevitable that many people are going to want to ask him lots of questions! So, what sort of questions is the accounting technician going to provide answers for? Well, here are a few examples. (a) What has the cost of goods produced or services provided been? (b) What has the cost of operating a department been? (c) What have revenues been? All of these questions may relate to different periods. For example, if someone wants to know what revenues have been for the past ten years, the accounting technician will need to extract this information from the cost accounting records. It is important therefore that the cost accounting system is capable of analysing such information. If the accounting technician knows all about the costs incurred or revenues earned, he may also be asked to do the following types of task. (a) To assess how profitable certain products or departments are. (b) To review the costs of products, and to use this information to enable him to set suitable selling prices. (c) To put a value to inventories of goods (such as raw materials) which are unsold at the end of a period. As you will learn later on in your studies, the valuation of inventory is a very important part of cost accounting. In order for the accounting technician to provide all of this information, the organisation must have a cost accounting system which is capable of analysing cost information quickly and easily. ThiNganHang.comThe accounting technician may also need to provide information onThis is an integral part of theBy comparing current costs with budgeted costs, the accounting technician should be able to highlightplanning or budgeting process. future costs of goods and services. areas which show significant variances. These variances should then be investigated. Most cost accounting systems should be capable of producing regular performance statements, though the accounting technician himself is likely to be the person producing them, and distributing them to the relevant personnel. The role of an accounting technician in a cost accounting system is therefore fairly varied. The role is likely to include spending much time providing answers to the many questions which may be directed at the accounting technician (such as those that we have considered here). Part A Introduction to accounting for costs ⏐ 1: Management information 11 ThiNganHang.com
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Exam focus When answering paper-based examinations, always make sure that your answers are neat and well- point presented. Marks are usually awarded for presentation – don't throw them away! 4 Costs in outline Let us suppose that in your hand you have a red biro which you bought in the newsagent's down the road for 50c. Why does the newsagent charge 50c for it? In other words what does that 50c represent? From the newsagent's point of view the cost can be split into two. Price paid by newsagent to wholesaler Z Newsagent's 'mark-up' Y 50c If the newsagent did not charge more for the biro than he paid for it (Y) there would be no point in him selling it. The mark-up itself can be split into further categories. Pure profit X Amount paid to shop assistants X Expenses of owning and operating a shop (rent, electricity, cleaning and so on) X Y The newsagent's profit is the amount he personally needs to live: it is like your salary. Different newsagents have different ideas about this: this is why you might pay 60c for an identical biro if you went into another newsagent's. The shop expenses are amounts that have to be paid, whether or not the newsagent sells you a biro, simply to keep the shop going. Again, if other newsagents have to pay higher rent than our newsagent, this might be reflected in the price of biros. The amount paid to the wholesaler can be split in a similar way: there will be a profit element and amounts to cover the costs of running a wholesaling business. There might also be a cost for getting the biro from the wholesaler's premises to the shop and, of course, there will be the amount paid to the manufacturer. The majority of the remainder of this Interactive Text takes the point of view of the manufacturer of products since his costs are the most diverse. If you understand the costing that a manufacturer has to do, you will understand the costing performed by any other sort of business. Let us go on to have a look at costs in detail. 5 Costs in detail FAST FORWARD • Direct costs can be traced directly to specific units of production. • A cost unit is a unit of product which has costs attached to it. The cost unit is the basic control unit for costing purposes. • Cost centres are the essential building blocks of a costing system. They act as a collecting place for certain costs before they are analysed further. ThiNganHang.com5.1 Production costs• Overheads (indirect costs)the benefit of all products rather than for any one specific product.cannot be identified with any one product because they are incurred for Look at your biro and consider what it consists of. There is probably a red plastic cap and a little red thing that fits into the end, and perhaps a yellow plastic sheath. There is an opaque plastic ink holder with red ink inside it. At the tip there is a gold plastic part holding a metal nib with a roller ball. Let us suppose that the manufacturer sells biros to wholesalers for 20c each. How much does the little ball cost? What share of the 20c is taken up by the little red thing in the end of the biro? How much did somebody earn for putting it there? 12 1: Management information⏐ Part A Introduction to accounting for costs ThiNganHang.com
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