Cost Process Definations

7/30/2019 Cost Process Definations

1/8

Methods of Costing

Costing can be defined as the technique and process of ascertaining costs. The principles

in every method of costing are same but the methods of analyzing and presenting the costs

differ with the nature of business. The methods of job costing are as follows:

1. Job Costing

The system of job costing is used whereproduction is not highly repetitive and in addition

consists of distinct jobs so that the material and labor costs can be identified by order

number.

This method of costing is very common in commercial foundries and drop forging shops

and in plants making specialized industrial equipments.

In all these cases, an account is opened for each job and all appropriate expenditure is

charged thereto.

2.Definition of 'Unit Cost'

The cost incurred by a company to produce, store and sell one unit of a particular

product. Unit costs include all fixed costs.

(i.e. plant and equipment) and all variable costs (labor, materials, etc.) involved in

production.

it cost is an important metric to look at when evaluating a "unit grower" stock, or a

stock that chiefly produces items thathave a low fixed cost. Generally, the larger a company grows, the lower the unit

cost it can achieve through economies

of scale.

Related Definitions

Variable Cost

A corporate expense that varies with production output. Variable costs are those costs

that vary depending on a company's production volume; they rise as production

increases and fall as ... Fixed Cost
http://www.investopedia.com/terms/v/variablecost.asphttp://www.investopedia.com/terms/f/fixedcost.asphttp://www.investopedia.com/terms/f/fixedcost.asphttp://www.investopedia.com/terms/v/variablecost.asp


2/8

A cost that does not change with an increase or decrease in the amount of goods or

services produced. Fixed costs are expenses that have to be paid by a company,

independent of any ...

Incremental Cost

The encompassing change that a company experiences within its balance sheet due toone additional unit of production. Also referred to as "marginal cost

3. Process Costing

If a product passes through different stages, each distinct and well defined, it is desired to

know the cost of production at each stage. In order to ascertain the same, process costing is

employed under which a separate account is opened for each process.

This system of costing is suitable for the extractive industries, e.g., chemical manufacture,paints, foods, explosives, soap making etc.

Costs Behaviour and Costing Methods

Costing is the process of identifying and allocating the cost of inputs

(resources) to outputs (services).

There are many different costing methods. Unit costing is one method that

can be used for VFM Reviews

Unit Costing

We all recognise that absolute costs can increase year on year; but what

exactly are we getting for our money? Are we providing more services? Or

are the services we provide just getting more costly? Without linking what we

spend (input) to what we provide (output) we do not know how cost effective

we are. Measuring the cost per unit produced (unit cost) is therefore one way

that we can define Value for Money.

By comparing the unit cost of the service over time we can track our

progress on cost effectiveness. Comparing unit costs with other similar

organisations we can assess our relative efficiency.
http://www.investopedia.com/terms/i/incrementalcost.asphttp://www.investopedia.com/terms/i/incrementalcost.asp


3/8


4/8

Fixed Storage fees for market

equipment

Office accommodation

for supervisory staff

Variable Employee costs for

putting up stalls

Debtors recharge per

invoice raised

Variation in output may be associated with a change in inputs depending on

the type of cost. In other words, the more services you provide, the more it

will cost. For example, increasing the number of markets held would mean

additional hours worked and therefore increased employee costs. Certain

costs are fixed and would not vary directly with output. For example, storage

costs for the stalls when not in use would not vary with number of markets

held.

Outputs

Identifying units produced may not always be straightforward. Not all

services have separately identifiable jobs; many may provide continuous

services; some may provide a mixture of services. We need to be selective

and find the most meaningful measure for each service.

Example Unit Cost: Markets Service - Figures used for illustration only

The Markets Service provides 141 pitches for market traders. Occupancy

achieved over the year is 78%.

Total expenditure 2006-07 budget 209,230

Occupancy in days

50 weekly markets x 141 stalls x 78% = 5,499 days

Cost per day per stall

209,230/5,499 market days = 38.05 per stall per market day


5/8


6/8

qualitative and complex. The primary motivation for our managers is

delivering a high-quality service that meets the needs of the public.

However, it would be wrong to see the emphasis on unit cost as being in

conflict with the need to continually improve service standards. The most

efficient organisations manage to combine low unit costs and satisfied

customers.

Public sector managers, like their private sector counterparts, need to see

driving down unit costs as intrinsic to delivering a high-quality service. Given

the publics growing awareness of council tax levels in particular, this is

especially so for local authorities. Public Finance 30

th

June 2006

High-quality services are those that are highly productive. If we do not seek

to increase productivity, we are short-changing service users, since we are

forgoing the opportunity to release more investment to frontline services

Frequently Asked Questions

Q: My support service charges have increased and pushed up my unit

costs. This is outside my control.

4c Cost Behaviour and Costing Methods.doc - 3 -

3 A: Support services are charged to each service based on measures which

are designed to reflect use. Knowing how and why a support service has

been charged to your service should help explain why it has changed. Speak

to your service accountant to find out more. If you have processed more

payments, for example, the charge for the creditors service will increase.

It may be that a particular support service cost has increased overall because

of more investment (for example IT). This should result in an improvement in

service quality which should ultimately improve customer satisfaction or

productivity.


7/8

Q: We have invested in new equipment which has increased our unit

cost for this year only.

A: Costs associated with investment in equipment are correctly charged to

the service. Investment in equipment will result in maintaining or improving

the quality of service delivered. Explaining a one-off blip in unit costs and

following by a return to the expected or improved trend, together with

maintained or improved quality measures, will demonstrate the effectiveness

of the service.

Q: We now get charged for capital charges on IT investment, which

wasnt there before.

A: All costs that are charged to services are done in line with best practice.

This is so that we can show the total cost of each service. Changes in

accounting practices do sometimes cause significant changes in costs

between years. It may be helpful sometimes to recreate costs to put them on

the same basis and so to show the reason for the change. Ask your service

accountant about this.

Q: My caseload has fallen below what I had expected and this has

pushed up my unit cost.

A: Output will inevitably vary over time. Being aware of your costs and how

they relate to output will help react to this. Over the long term, reduction in

caseload should allow resources to be redirected. An increase in caseload can

reduce unit costs in the short term but may demonstrate the need for

additional resources.

Q: The service unit cost has been kept at the same level as last year.

Does this mean I can count it as an Efficiency Gain?

A: If you are producing more for the same or lower cost , and you can

demonstrate that the quality of your service has been maintained you can

include it as an efficiency gain.


8/8


4 Q: How do I know whether a cost is indirect or direct?

A: Direct costs can be directly assigned to a particular service, process or

department. An example would be pay costs which represent the time spent

on a particular task. A non-pay cost might be supplies which are charged to a

service based on usage. Indirect costs cannot be directly assigned and are

usually applied as a percentage.

As a general rule, most of the budgets you control are direct costs. However,

if you are in doubt ask your service accountant.


5

Documents

Cost Process Definations