© Pearson Education Limited 2003 Atrill, McLaney: Accounting and Finance for Non-Specialists, 4th edition OHT 8.1 Full costing OBJECTIVES You should be able to: Distinguish between direct and indirect costs and use this distinction to deduce the full cost of a job in a multi-product environment Deduce the full cost of a unit of output in a single-product environment Explain the role and nature of activity-based costing Discuss the problem of charging overheads to jobs in a multi-product environment

© Pearson Education Limited 2003 Atrill, McLaney: Accounting and Finance for Non-Specialists, 4th edition OHT 8.2 Direct and indirect costs These are all other costs: that is, those that cannot be directly measured in respect of each particular unit of output. Two categories of costs Direct costs Indirect costs (or overheads) Costs that can be identified with specific cost units – the effect of the cost can be measured in respect of each particular output.

© Pearson Education Limited 2003 Atrill, McLaney: Accounting and Finance for Non-Specialists, 4th edition OHT 8.3 Direct and indirect costs in practice Indirect costs Direct costs 70 per cent 30 per cent A survey of 176 fairly large UK businesses, conducted during 1999, revealed that, on average, total costs of businesses are in the following proportion:

© Pearson Education Limited 2003 Atrill, McLaney: Accounting and Finance for Non-Specialists, 4th edition OHT 8.4 The relationship between direct costs and indirect costs Full cost of the unit Direct costs of the unit Fair share of indirect costs (overheads)

© Pearson Education Limited 2003 Atrill, McLaney: Accounting and Finance for Non-Specialists, 4th edition OHT 8.5 The relationship between fixed costs, variable costs and total costs Total (or full) costs Fixed costs Variable costs

© Pearson Education Limited 2003 Atrill, McLaney: Accounting and Finance for Non-Specialists, 4th edition OHT 8.6 The relationship between direct, indirect, variable and fixed costs of a particular job Total (or full) cost of a particular job Indirect costs (overheads) Fixed costs Direct costs Variable costs

© Pearson Education Limited 2003 Atrill, McLaney: Accounting and Finance for Non-Specialists, 4th edition OHT 8.7 A cost unit (Job A) passing through Autosparkle Ltd’s process Preparation Department Customers Finishing Department Paintshop Department Job A * Direct materials * Direct labour * A share of the Preparation Department’s overheads * Any further direct costs * A share of the Paintshop Department’s overheads * Any further direct costs * A share of the Finishing Department’s overheads Full cost of the job + + = Costs accumulated

© Pearson Education Limited 2003 Atrill, McLaney: Accounting and Finance for Non-Specialists, 4th edition OHT 8.8 Uses of full cost information Two main uses For pricing purposes For income measurement purposes

© Pearson Education Limited 2003 Atrill, McLaney: Accounting and Finance for Non-Specialists, 4th edition OHT 8.9 ManufacturingRetail Service Financial and commercial Others % ABC implementation in practice Source: Adapted from Table 7.10 from Cost System Design and Profitability in UK Manufacturing Companies, p. 55, CIMA Publishing, by C. Drury and M. Tayles (2000), reprinted by permission of Elsevier Ltd