Business & Management Costing Or, which parts of the company are profitable. (You can run, but you can’t hide!

Business & Management Costs  Cost centres  Profit centres  Direct costs  Indirect costs

Business & Management Contribution Calculated by… revenue – direct costs = contribution  How much the cost centre ‘contributes towards the indirect costs of the whole company.

Business & Management What’s the point of carrying on?  It is worth carrying on with something even if it is making a loss…  PROVIDING it is making a positive contribution.  WHY?

Business & Management Costing methods  Full costing  Absorption costing  Marginal costing (special orders)  Standard costing

Business & Management Full costing  Indirect costs are treated as one big lump  A proportion are allocated to each cost (or profit centre)  N.B. How you allocate indirect costs will affect profitability of centres.  Contribution – allocated indirect costs = Profit for that centre.

Business & Management Absorption costing  Similar to full costing but more realistic  INDIVDUAL indirect costs are allocated in the most appropriate way.  Then it is the same as full Contribution – allocated costs = Profit for that centre

Business & Management Marginal costing  Marginal means “one extra”  Common exam question.  Looking solely at contribution  If it is positive, then worth doing  If negative then stop! NOW!  As always, consider non-financial factors too.

Business & Management Standard costing  How much something should cost  Can compare with the actual cost.  Obviously, has strong links with budgeting.