Cost Centres

• We saw that costs can be analysed by function into the main operational area of an org.
  
• Cost centres are used to help with the functional analysis of costs
  
• Are sections of an organisation to which costs can be charged
  
• In manufacturing business it can be an entire factory, a department of a factory, or a particular stage in the production process
  
• In a service industry it can be a shop, or a group of shops
  
• Any section of a business can be a cost centre
  
• A Manager or a Supervisor are usually responsible for each cost centre and are also responsible in taking the data from the account System

Analysis of Costs to different cost centres

• Once cost centres are established it is important that the accounts system provides info to the managers
  
• To do so separate accounts are created for each cost to cover main cost headings ( ie labour cost can be divided into “ wages and salaries”, production etc.
  
• This information is accurate to Managers as it provides them.

Managers will be able to:
· To plan for the future – using actual costs to forecast future incurring costs
· To make decisions – Comparing the costs of different products or services, whether to increase or decrease output
· Control costs – comparing actual costs with budgeted costs

Where does the information come from?

• Purchase orders and purchase invoices for materials and expenses costs
  
• Payroll schedules for labour costs
  
• Bills and cash receipts for expenses costs

Profit Centres

• Sales Income – Costs = Profit
  
• Such centres are called Profit Centres
  
• The information on Sales is collected from orders and sales invoice emitted to our customers
  
• Profit Centres are sections of a business to which costs can be charged, income identified and finally profit calculated
  
• Therefore Profit Centres have both Costs and Income

Mangers of a shoe factory can calculate the profit by:
Example:
Income for sales of shoes
Less
Costs of making shoes

Coding System

• Coding System are used to organise and analyse data
  
• Are usually used extensively in costing
  
• Three main types of coding:
  - Numeric
  - Alphabetic
  - Alpha – numeric coding

Numeric Coding

• Each code is made up entirely of numbers
  
• Used extensively in accounting and costing for accounts numbers and identification codes
  
• Drawbacks of the System is that a numeric code may easily be forgotten.

Alphabetic Coding

• Each code is made up entirely of letters
  
• Many website addresses have alphabetic codes
  
• Easier to remember than numbers if the word created “makes sense”
  
• Can provide more available codes than numeric ones ( ie aa, bb , zz etc.)

Alpha-numeric coding

• Codes made up of both letters and numbers
  
• UK postcode is an example of alpha-numeric coding
  
• Some accounting system use alpha-numeric coding for customers (ie A01 for customers whose names begins with A)

Use of Coding in Costing

• Codes in a costing system are used to collect data about costs and income
  
• Analyse the amounts into categories
  
• Sales and purchase invoice and other documents that contain data will also be “coded”
  
• The value amount with the codes will then be recorded into a computerised system or database.

So if a shoe manufacturer wants to use an alpha numeric coding system then the amount of income from the sales of shoes could be coded to:
B 10
If B related to the profit centre “Shoes”
And 10 was the sub code for “sales income”

The cost of machinists “wages in the sewing section” could be coded to:
H 30
If H related to the cost centre “sewing section”
and 30 was the sub-code for “direct cost”

Cost Behaviour

Cost behaviour is the way that costs change/alter when the level of output or activity changes ( i.e. for a manufacturing is the quantity of items produced or for a service will be the volume of services provided)

• There are three main ways that costs may behave:
  - Fixed Costs
  - Variable costs
  - Semi-variable costs

Fixed Costs

Fixed Costs do not alter when the level of output or activity changes
£ 5000 Rent for a Shoes Factory....whether we produce 100 or 10.000 shoes, the factory Rent remains same

• Rent and Rates
  
• Insurance
  
• Staff salaries

Variable Costs

• Variable Costs change in proportion to the level of output or activity.
  
• If the shoe manufacturer makes 100 shoes and the cost of leather for each shoes is 10 then = 100 X 10 = £ 1000
  
• If the shoe manufacturer makes 200 shoes then = 200 X10 = £ 2000
  
• Material used in production
  
• Labour paid per unit produced
  
• Packing material
  
• Vehicle fuel for a delivery organisation

Semi Variable costs

• Semi variable costs contain both fixed element and a variable element
  In the shoe manufacturing factory we have a shoe maker that earns £1000 per month as a basic salary, plus a bonus of £ 1 for every shoes he or she makes then the cost of employing this person would be semi-variable
  - The basic salary will be the fixed costs
  - The bonus would represent a variable cost.