CAT / FIA FMA Syllabus A. The Nature, Source And Purpose Of Management Informa - Codes in categorising transaction - Notes ^{5 / 9}

A code is “a system of symbols designed to be applied to a classified set of items to give a brief accurate reference, facilitating entry, collation and analysis ”.

A cost coding system is therefore based on the selected cost classifications. It provides a way of expressing the classification of each cost in a shortened symbolized form.

To use descriptions only of the items would lead to ambiguities and difficulties in recording and processing the information. The items need to be logically coded.

For example, 5 cm brass plates may be coded as 05677 and no other class of item should be coded the same.

The advantages of a coding system

Some of the advantages of a well-designed coding system are

1. It is more suitable than a description in computerised system.

2. A code reduces ambiguity.

3. A code is usually briefer than description.

The requirements for an efficient coding system

• The codes will either be all numerical or all alphabetical.

• The codes will be brief, have a logical structure and be of the same length- for example, 5 digits long.

• There will be no ambiguities in the codes and the system must be such that all items can be assigned a code.

• The code must be capable of expansion so that new items can be accommodated.

• The control of the coding system will be centralised to avoid the proliferation and duplication of codes

Types of Code

1. Composite codes

   The CIMA terminology describes the use of composite symbols in codes.  

   The first three digits in the composite code might indicate the nature of the expense whereas the last three digits might indicate the cost centre or the cost unit to be charged.

   For example: 

   Symbol 892.133 means:

   • 8 – labour

   • 9 – semi-skilled

   • 2 – grade 2

   • These codes are showing this was semi-skilled labour

   • 1 – indirect cost

   • 1 – Factory XYZ

   • 3 – finishing department

   • This code shows us this labour expenditure is to be charged as indirect labour to the finishing department in factory XYZ

2. Sequence (or progressive) codes

   A sequential code simply follows a sequence.   Imagine we are drafting a register for employees for salary purposes.   

   We begin with the first employee being assigned the number 00, the second employee is assigned the number 01 and so on. 

   In this code, we have allowed for there to be as many as 100 employees, since we have allocated 2 digits to the code and can assign all of the numbers from 00 to 99, 100 numbers, to that number of employees:
    
   00 Cassar       01   Farrugia       02   Vella        03   T Borg … 34   S Borg … 67   Abela …
    
   If a new employee were to join this group?   He would become employee 68

3. Group classification codes

   Group classification (block) codes are very common in accounting circles in that they commonly form the basis of charts of accounts, as depicted below:
    
   1000 – Non-current assets
   2000 - Current assets (excl. inventories)
   3000 - Inventories
   4000 – Non-current liabilities
   5000 - Current liabilities
   6000 - Equity
   7000 - Revenues
   8000 - Expenditures
    
   The 1000 “Block” is allocated to non-current assets.   This means that it is possible to classify up to 1,000 different non-current assets using this block.   

   Of course, there may be sub blocks so that we can extend the range of non-current assets we can have.

4. Faceted codes

   These are refinement of group classification codes, in that each digit of the code gives information about an
   item. 

   For example

   The first digit:

   1 - Nails
   2 - Screws
   3 - Bolts

   The second digit 
   1 - Steel
   2 - Brass
   3 - Copper

   The third digit 
   1 - 50mm
   2 - 60mm
   3 - 75mm

   Therfore, a 60mm steel screw would have a code of 212

5. Significant digit codes

   These incorporate some digits which are part of the description of the item being coded. 

   For example
   Screws 5060  - 60mm screws
   Screws 5075 -  75mm screws

6. 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
   32 = round headed screws
   322 = steel (round headed ) screws and so on