/ Tutor: Salina Loum AAT Level 2 Basic Costing This Unit will be divided into 5 lessons: Lesson 1: Cost Classification and Coding of Costs & Income Lesson 2: Materials and Inventory Lesson 3: Labour Costs Lesson 4: Budgeting and Spreadsheets Lesson 5: Revision and Exam Practice

Unit Objectives: To understand the cost recording system within an organisation To be able to use the cost recording system to record or extract data To be able to use spreadsheets to provide information on actual and budgeted income and expenditure.

Lesson 1 CharacteristicFinancial Accounting Management Accounting Looks mainly at historical information Can include future forecasts and budgets Formats are dictated by accounting rules Content can include anything useful Produced for shareholders and other external users Produced to help managers run the business Produced in full once a year (and in some cases every 6 months) Typically produced on a monthly basis Financial Accounting and Management Accounting

Purposes of Management Accounting Decision Making Planning Organising Control Motivating Communicating

Costing Accounting Definition = Process of calculating and recording the costs involved in the production and distribution of products and services Aims of Cost Accounting: To calculate the sales price Determine costs and profits Value and control stock Prepare budgets and forecasts Control costs Provide decision making information

Cost Classification By Nature Direct Cost: Directly attributable to cost unit Total of all direct costs = prime cost per unit Indirect Cost: Cannot be attributed to any one finished unit. Also referred to as ‘overheads’ Cost Classification by Element Materials:costs will be the raw materials used in the unit Labour:costs will be made up of basic pay, overtime, bonuses and commission Overheads:exist regardless of production such as cleaning costs, power costs, rent, rates, advertising and insurance

Cost Classification By Behaviour Variable: Increases as the level of activity increases such as direct labour and direct costs Fixed: Does not increases as the level of activity increases such as rent and rates Semi Variable: Contains both variable and fixed elements such as electricity costs (daily standing charge plus usage). Also known as mixed costs or semi-fixed costs Stepped Cost: Remains fixed over a certain level of activity but increases if activity increases above that level. For example, stock storage costs and supervisor salaries

Cost Classification By Function Production: also known as cost of sales which includes production labour and materials Selling and Distribution:such as delivery and installation costs and sales team commission Administration: includes head office costs, IT support and HR support

Classification of Costs and Coding Classification of Costs = determining costs that relate to each cost or profit centre Cost Code is then allocated to the expense to represent this classification Code = system of symbols designed to be applied to a set of classified items to give a brief accurate reference which helps entry to the records, collation and analysis.

How to Create a Cost Code Need to identify: 1.Profit/cost centre incurring the cost 2.Type of cost incurred There are no set methods of designing a cost code. It will be the code that best suits the organisation’s operations and costs. Examples: Numeric = 100/310 Alphabetic = AB/RT Alpha-numeric AB310

Purpose of Cost Codes Assist precise information Facilitate electronic data processing Facilitate a logical and systematic arrangement of costing Simplify comparison of totals of similar expenses Incorporate check codes

Coding in Practice Timing of Coding Receiving an Invoice Choosing the Correct Code Cheques and Cash Payments Shared Costs Payment of Wages and Salaries Problems with Coding What Code? Apportionment