Basics of Costing

Cost is a word used to describe the money spent on a particular thing. In our private lives, we talk about the cost of running a car or the cost of heating our home. In a business context, we can talk about the cost of labour, or the cost of running a department, or the cost of a particular product or service sold to customers.

Every business organisation incurs costs – whether we are self-employed, or work for local government, or are employed in a profit-seeking organisation. Costs are incurred on the resources consumed by the organisation when carrying out its business objective of satisfying customers. The resources that are consumed are materials, people’s effort, bought-in services, wear and tear on equipment, and even money itself, which has an interest cost.

These running or operating costs are referred to by accountants as revenue expenditure to distinguish them from the initial cost of new physical assets, such as buildings, equipment and vehicles. The acquisition costs of these fixed assets is referred to as capital expenditure. This chapter is primarily concerned with the former, ie revenue expenditure incurred on the day-to-day running costs of the organization when doing work for its customers and clients.

Costing is the analysis of costs so that they can be allocated to products/services, activities, departments and specific periods. This objective analysis of costs is typified when they are charged to the end product or department consuming such costs. There is also a need for subjective analysis of costs. This looks at the nature and type of costs and describes them in various ways – for which we later need to learn a little jargon. Costing is, therefore, an in-house accountancy service to provide relevant information to managers in a timely and cost-effective way. We shall start our study of costing by considering where cost information comes from and how accountants deal with it.

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