Costing principles

• Markup?


  This is the profit calculated on the cost price.
• Margin?


  This is the profit calculated on the selling price.
• Advantages of Cost Plus Pricing

  • Easy to calculate
  • Easy to adjust price if price rises
  • Allow pricing decisions to easily be made
• Absorbtion Costing


  Charging or assigning overhead cost to the various departments/cost centres.
• Overhead Absorbtion Rate Formula

  OAR = estimated overhead cost/ estimated cost driver
• Elements of Cost


  Materials – resources needed to make the product

  Labour – amount to pay workers

  Expenses – daily operating cost
• Types of Cost

  • Direct Costs (Prime Cost)
  • Indirect Costs (Factory Overheads)
  • Administrative Costs –
  • Selling and Distribution Costs
• Fixed and Variable Costs

  • Fixed Cost – cost that does not change with increased output, example: rent, insurance,mortgage / lease.
  • Variable Cost – cost that changes based on number of output, example: electricity, water bill, sales commission, material, deliver cost/ carriage outwards, labour
• Cost Centres

  These are areas in the business that generate their own cost example are the various

  departments.
• Allocation cost

  Allocation is dividing cost to different departments based on level of activity (direct)
• Apportionment cost


  sharing cost based on some predetermined cost driver