COSTS AND DECISION MAKING (Analysing Gross Profit (Is the selling price…
COSTS AND DECISION MAKING
Why costs of products, processes and services needs to be known
Essential part of effective management
Costs must be shown in financial statements
Costing allows management to monitor and plan activities
Cost Unit is the unit of product for which a cost is computed
(such as material, labour, expenses)
(Direct or indirect)
(fixed, variable, semi-var, stepped fixed)
(covers unusual events that affect costs)
(whether a manager can influence the cost)
Why are cost systems needed?
Provides a basis for assessing past performance
Helps plan for future operations
Monitors actual performance against the budget
Assists in decision making
Assists in cost reduction and control
Analysing Gross Profit
Is the selling price enough?
Is it enough GP overall?
Does it cover expenses?
Will there be a Net Profit?
Can the GP be increased?
With enough info, management can make changes - adjust prices, production levels, cost plans etc
Accountants tend to need to know a lot. For e.g. in a window producing co. accountants need a breakdown of cost of sales - wood, fittings, glass, service, assembly, finishing, factory expenses etc.
Nature of Production Costs
Classified into 3 broad groups
Needs a proper inventory system
System must control -
Costs should be collected and charged to appropriate cost object
Remuneration can be paid in 2 ways - Time-related or Performance-related
For time based remuneration, recording time is essential, so a time keeping record is needed
In performance related pay (PRP), the pay is dependant on the efficiency or effectiveness of the staff. Systems should track progress (e.g. # of units made) and use this to pay staff.
Normally PRP is in addition to a basic wage
Labour costs can be direct or indirect, variable or fixed
(Production and Non-production)
Production includes supervisor salaries and factory rent
There are many overheads that needs to be recorded such as:
All costs will be kept on a
- a summary of all costs that shows the total cost of 1 unit of produce