Cambrige AS and A Level Accounting Notes (9706)/ ZIMSEC Advanced Accounting Level Notes: Costing for Overheads: Introduction
- A business needs to know the cost per unit of its products for many reasons
- For example in order to be able to:
- Value its inventory properly
- Come up with an appropriate selling price so that they can ensure they are making a profit
- To analyse the profitability of the business, certain strategic units, different product mixes etc
| Cost type | $/unit |
| Direct materials | xxx |
| Direct Labour cost | xxx |
| Direct expenses (e.g. royalty per unit) | xxx |
| Prime Cost/unit | xxx |
| Overhead portion/unit | xxx |
| Total Cost/Unit | xxxx |
- In principle the unit cost of direct materials, direct labour and direct expenses should not be a problem to ascertain
- By their nature they can be traced to the product for example a baker would know how much flour,salt,sugar and milk (direct materials) each loaf requires
- Arriving at the cost of these materials should be pretty routine
- Overheads on the other hand cannot be so readily calculated
- In particular fixed overheads are really difficult to establish for each given unit
- Consider a baker who pays rentals of $10 00 per year
- How much of this should he include into each unit of bread that he bakes and sells?
- Traditionally two methods have been used to solve this problem:
- Absorption costing and
- Marginal Costing
- Both have their advantages and disadvantages
To access more topics go the ZIMSEC Advanced Level Accounting page
To access more topics go to the Cambridge AS/A level page
