Question

A manager has trouble understanding charts of cost and ask you to explain a report in simple terms, how would you explain a cost budgeting report to the manager?

this is question of cost accounting

Answer 1

Explanation of costing terms used in report in simplified manner-

Sales-

Sales is gross inflow from providing of goods to customers. It means any amount of receipt of cash from providing of goods is sale.

Variable cost-

There are three main component of variable cost in prime cost (material,labor,overhead)

Material are the items used in production of product which has to be sold to the cistomer in order to genrate above mentioned cashflows.Material will be reported based on accrual system of accounting i.e material which is kept in warehouse at the end of reporting period (generally financial year end) shall not be reported in cost chart.

Labor are the manpower used in making production process feasible. Unless labor is used in production process there should be no production of any product.

Overhead are those expenses which are necessary to enable those production machine to operate smothly. These are electricity, mobilile use in machine etc.

All the above mentioned expenses are direct expenses which is increased or decreased with the production of no. Of unit of product.

Contribution margin are the balance which has arrived after reducing above mentioned direct variable cost, this is calculated to enable a company to recognise the clear base of profitablity of company. This analysis eases company's to determine % of cost required to sale the desired no. Of unit and vice versa.

Fixed cost are those cost which is not subject to change with the change in production of units produced. These costs remains same even if production is on it's highest level or it's lowest level.

Net income is residual of contribution minus fixed cost, this is for what a company is working, (in costing and strategic management, business is establised for profit)

Other explanations-

Sometimes variable selling expenses is also incurred but these cost are not considered as prime cost because these are considered as period cost( which moves as per period but not as per increase or decrease in production of product)

Absorption costing is used for reprorting purpose in applicable costing reporting. Under absorption costing budget fixed cost per unit is multipled by actual activity (machine hour or labour hour etc.) to arrive at allocation of fixed cost on particular product.

Please comment for any specific explanation.

Thanks,