CIMA BA2 Syllabus B. COSTING - Cost Identification and Cost Classification - Notes 1 / 8
Definitions of Costing
There are 3 that we need to know:
Cost Object
This is anything that we want to cost, for example the cost of a product / customer / department.
Cost Unit
A cost unit is ONE unit of that product or service (Eg Labour hour or Unit)
Cost Centre
This is all the costs for a location / function (Eg. Production department)
They can also be split into
- Production Cost Centres (involved with the production of the item)
- Service Cost Centres (involved with providing service to the production centres)
Cost Classification
By its Nature
Eg, Materials, Labour and Overheads
By its Behaviour
Eg Variable / Fixed
By its Function
Eg. Production, Admin, Accounting.
This is the most common form of classification.
| Cost by Function | ||
|---|---|---|
| Direct Materials | x | Direct means that we can directly identify the amount of material that has gone into making the product |
| Direct Labour | x | Direct means that we can directly identify the amount of labour that has gone into making the product |
| Direct Expenses | x | Direct means that this expense was incurred specifically to make this product |
| Prime Cost | x | Total direct costs is known as the prime cost |
| Other Production Ovherheads | x | Eg. Electricity, it is incurred while producing but is an overhead because we cannot directly identify the amount that went into making the product |
| Total Production Cost | x | |
| Other Non-Production Overheads (admin/selling) | x | |
| Total Cost | x |
Direct v Indirect
Direct
Directly traceable to the product
Indirect
Not directly traceable to the product
Materials
Direct Material - Eg. Wood for making a chair
Indirect Material - Eg. Cleaning supplies used when making the chairs (Not directly traceable to one chair)
Labour
Direct Labour - Eg. The carpenter making the chairs - he is directly involved in making the chair
Indirect Labour Eg. The factory supervisor - he is only overlooking the process, not directly involved in making the product
Expenses
Direct Expenses - Eg. A patent for the design of this chair
Indirect Expenses - Eg. Rent and electricity - being used for production but cannot be specifically identified to making this chair.
Prime Cost
As seen in the table above
Direct material + Direct labour + Direct expenses = Prime cost
Indirect material + Indirect labour + Indirect expenses = Production overheads
Historic and Economic costs
Historic costs are the original cost to the organisation
Economic costs are the most someone is willing to pay for the asset.
Environmental Costing
Being environmentally conscious means that society will be pleased with the organisation's behaviour and buy more of their products because of this!
What are the costs of being environmentally conscious?
Prevention Costs
Eg. creating a product design that eliminates waste
Appraisal Costs
Eg. testing whether this design actually eliminates waste.
Another example can be compliance costs to test whether all the regulations are complied with.
Internal Failure Costs
Eg. failing to get rid of the waste, however this product has not been available to the public yet, the defect was discovered internally.
External Failure Costs
Eg. failing to get rid of the waste - and the public has found out about it as the product has already been made available to the public.
This is the most expensive environmental cost as goodwill is lost and the public will stop buying the products.