Cost (Business)

BUSINESS NOTES: COSTS
Uses of accurate cost information:

1. Calculation of profits or losses- This simply means that when a business has accurate cost
information that has not been altered then they can calculate their exact profits or losses during
a certain period of time.
2. Pricing decisions- A business with accurate cost information can set their price based on the
costs they have,specifically cost plus pricing if the costs of production are high.
3. Measuring performance- When a business has accurate cost information then it is able to
measure it’s performance based on whether the costs have increased or decreased.
4. Setting a budget- Accurate cost information can be used to set budgets because depending on
the amount of costs each department incurs then the budget will be set.
5. Resource use- This may refer to labour costs as an example because if wage rates are low that
means the cost of production is low and the business can decide to be labour intensive instead
of capital intensive.
6. Decision making- Accurate cost information can be used to make decisions such as location
decisions and choices related with expansion.
Types of costs:
We have different types of costs,such as:

 Direct costs
 Indirect costs
 Fixed costs
 Variable costs
 Semi-variable costs
 Marginal costs
 Total costs
Direct costs- Costs that are identifiable with every unit of production and can be
allocated to a cost centre. ( A cost centre is the section in a business such as a
department or a product,which incurs a cost). Examples of direct costs include labour
costs or costs of production and retailing costs.
Indirect costs- These are costs that cannot be identified with every unit of production or
allocated to a cost centre accurately. Examples include purchasing of non current
assets and also rent.
Fixed costs- Defined as costs that do not vary with output in the short run or costs that
do not change when the level of output changes. Examples include salaries,loan
payments and insurance premiums.
Variable costs- These are simply costs that vary with output,such as electricity and
water bills.
Semi-variable costs- They include both fixed and variable cost elements. A simple
example could be the fixed water bill plus the cost per unit used or the basic salary
paid to a sales person along with the commission.
Marginal costs- Referred to as the extra cost of producing one more unit of production.
It’s examples include : The extra raw materials required along with quality control
costs.
Total costs- These are fixed costs and variable costs combined and typical examples
may be: marketing and sales costs.
Problems with classifying costs:
1. Some costs can fall under two categories of costs,such as labour costs which
can be both variable and direct costs which can be variable because of as
production increases then the number of employees needed may also
increase and they can be variable based on the amount of workers needed for
production of one unit of a product.
2. The time factor, this is because for much larger organisations it takes a long
time because of their size,and this drags out the time for financial close (end of
year balance) which is critical internally and externally.
3. Transparency could be another factor because it may be difficult to understand
where some allocations come from and how they were derived.
APPROACHES TO COSTING
Calculatingcosts is not an easy task and managers could employ two methods
to help with the process which are:
 Full costing
 Contribution costing
PROBLEMS WITH COSTING METHODS:
- When calculating costs, the direct costs are easily identifiable and
allocated to a cost centre (direct costs sych as direct labour and direct
materials). However, these are not the only costs that are involved
during production,other costs include overheads and indirect costs
which cannot be be directly allocated to a unit of production and have
to be shared between all of the items produced by a business. There
is more than 1 way of sharing these costs and therefore there is more
than one way of answering the question:”How much does a product
cost to produce?”. This uncertainty leads to problems when deciding
whether to continue producing a product and also when deciding to
accept a new order for a product.
*Before studying the two main costing methods,cost
centres,overheads,profit centres and average cost have to be
understood thoroughly.
1. Cost centres: These are sections of the business such as

departments or products where costs are incurred,examples include:
- In a manufacturing business,it could be the products,stages of
production such as assembly and also certain departments.
- In a service business such as a hotel,it could be the
reception,the restaurant and the bar along with the rooms.
- In a school it could be the different subject departments and the
sports teams.
2. Profit centres: Sections of the business whereby both costs and
revenue can be allocated so that profit can be calculated. Examples
include
- Each department of a store
- Each branch of a chain of shops
*The benefits of profit and cost centres include:

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BUSINESS NOTES: COSTS

Uses of accurate cost information:

We have different types of costs,such as:

Problems with classifying costs:

PROBLEMS WITH COSTING METHODS:

1. Cost centres: These are sections of the business such as

*The benefits of profit and cost centres include:

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