The cost recording system: classification, cost centres and sources of data
The three elements of cost
Every cost recorded falls into one of three elements: materials, labour and expenses (everything else such as rent, fuel, depreciation). The first question is always whether a cost is direct - traceable in full to a cost unit, such as timber in a table - or indirect (overhead), which cannot be traced economically, such as factory rent or a supervisor's salary. Indirect costs are then classified by function: production, administration, selling and distribution, and finance.
Costs also behave differently: fixed (constant in total within the relevant range), variable (change in proportion to activity) and semi-variable (a fixed element plus a variable element, such as a telephone bill).
Cost centres and cost units
A cost centre is a location, person or item of equipment for which costs are collected - a machining department, a delivery van, a branch. A cost unit is the unit of output whose cost is required - one chair, a batch of 500, a tonne-kilometre. Confusing the two is a very common error in objective-test questions.
Sources of cost data
Materials: purchase invoices, goods received notes, material requisition notes and the stores ledger. Labour: clock cards, timesheets and payroll summaries. Expenses: invoices, plus journal entries for accruals, prepayments and depreciation. Every figure in a costing system should be traceable to one of these documents.
Worked example. A bakery pays £4,000 monthly rent, uses flour costing £0.40 per loaf and pays a production supervisor £2,500 a month. Flour is direct material (variable); the supervisor's salary is an indirect production cost (fixed); the apportioned rent is an indirect production cost (fixed).
Trap: overtime premium caused by a customer's rush order is direct; routine overtime premium is normally treated as overhead.