The responsibility of accounting is based on the recognition of individual areas or responsibility a specified in a firm’s organisation structure. These areas of responsibility are known as responsibility centres. A responsibility centre may be defined as a segment of the organisation where an individual manager is held accountable for the segment’s performance. There are three types of responsibility centre:

• A cost centre – where managers are accountable for the expenses under their control.

• A profit centre – where managers are accountable for sales revenue and expenses.

  
  

• An investment centre – where managers are normally accountable for sales revenue and expenses, but in addition are responsible for capital investment decisions and are thus able to influence the size of the investment.

  Other costs that affect decision making are:

  Sunk Cost: Any expenditure which has already taken place in the past and which will not be affected by a particular decision under consideration can be ignored – past costs are sunk costs.

  Incremental Cost: If a cost will be incurred if a particular course of action is taken, but avoided if the action is not taken, the cost is said to be incremental. Specific fixed costs appropriate to the decision may also be incremental if as a result of not taking the action contemplated, they can be avoided. These are sometimes called differential costs.

  Committed Cost: This is a cost which has its origin in a previous decision.

  Discretionary Cost: Such a cost doe not have to be made immediately such as the re-decorating of the firm’s offices. Management can choose the best time to do the work and when to spend the money. Sometimes referred to as the programmed or managed costs.

  Opportunity Cost: If a firms’ resources can be put to alternative use, then the opportunity cost is the opportunity forgone.

• 1. Standard cost systems are costly to implement and operate.

  2. Standards must be updated frequently.

  1. performance measurement;

  1. determination of reimbursement and fee or price setting;

  2. program authorisation, modification, and discontinuation decisions; and

  Absorption Method

  Absorption costing charges the fixed and variable costs involved in the making of products or the provision of a service, which is why it can also be called full costing. It does not under-estimate the importance of a fixed costs and ensures that these costs are covered, but only if the actual sales volume is equal or above the estimated sales volume. In the instance of failing to meet the estimated volume, the fixed costs would not be met. This could have diverse effects on the cashflow, the ability of a company to pay the fixed costs, the profitability and the future of the organisation.

  Key issues:

  • In spite of criticisms, absorption-costing systems are still prevalent.

  • Recognising the problems in absorption costing systems provides greater appreciation of how to implement such systems.

  • The average cost includes both fixed and variable costs divided by total units produced.

  • Below capacity average costs decrease as more units are produced because fixed costs are “spread” over more units.

  • Therefore, managers evaluated on average cost can lower average costs by producing more.

  • Greater production is a problem if excess units can not be sold.

  • Short-term income can be increased and the company can be harmed at the same time.

  • This is an example of a trade-off between planning and control.

  • The opportunity cost of capital and inventory handling costs should be recognised.

  • Also a policy of no excess inventory can be implemented.

  • Other performance measures can be chosen such as stock price changes.

  • The allocation of overhead costs simulates a tax on the allocation base.

  • If tax is greater than the opportunity cost of using the allocation base because of fixed costs, the allocation base will be underused.

  • If fixed costs are allocated to products, they will not generally represent the opportunity cost of using the indirect resource.

  • The allocation of costs to products greater than the opportunity cost can lead to the inappropriate dropping of products.

  • The reallocation of unavoidable costs can lead to a downward spiral.

  • Because of these problems, alternatives have been suggested and are becoming more popular.

    Criticisms of absorption cost systems

    Absorption costing transfers, as part of stock value some of the overheads incurred from a period previous into a future period, there is also a danger that stocks built up maybe not be saleable later and therefore the overheads absorbed will increase the future loss. Stocks may be increased as a deliberate policy to meet actual or expected orders, as a means of keeping the factory going to avoid laying off production workers or even to absorb overheads.

    It is tempting to keep production at normal levels when sales demand falls in order to avoid heavy under-absorptions reducing the already depressed profits. This can prove costly to the business because it not only risks having to sell such goods off cheaply later but it also incurs the costs of storing the goods and paying interest on the money borrowed to pay for the materials “tied up” in such stocks.

    Evaluation of other Different Methods

    Marginal/Variable Costing

    Marginal costing separates the fixed costs and only makes calculations to determine the profit using the variable costs of production or providing a service and subtracting this from the selling price to discover the contribution. Marginal costing provides valid information for internal decision making, although the appropriateness for external reporting is more debatable. Its real importance is in providing contribution and profit figures and identifying the possible profits available in different circumstances and these in turn could then help pay for the fixed costs.

    Marginal costing emphasises the contribution margin. This emphasis aids management in selecting product lines, in determining the optimal sales mix for pricing purposes, and in solving other problems involving choices. The data are especially important to companies that face make-or-buy decisions because variable costing facilitates comparing company costs with costs of buying from outsiders. In addition, the cost-volume-profit relationship provides a valuable tool for other short-run planning activities.

    The key points are:

  • With variable costing only the variable overhead is allocated to the product.

  • All fixed costs are treated as period costs.

  • One advantage is that the variable cost per unit approximates the opportunity cost of making another unit if the organisation is operating below capacity.

  • Variable costing also reduces the incentive to overproduce.

  • A variable costing system will also not have fluctuating product costs as the output volume changes. Variable costing will not approximate the opportunity cost if there is an opportunity cost of using fixed resources.

  • Fixed overhead resources may be overused if not allocated.

  • In spite of advantages, most companies still use absorption costing.

  • Cost object: identify the object to be costed, such as a product, customer, or service.

  • Activity cost pools: identify the major activities and break out the costs for each.

  • Driver: choose an appropriate cost driver for each activity cost pool.

  • Rate: compute the activity cost rate for each activity (equals pool divided total base).

  • Assign: assign costs to objects based on the activity cost rate.

    Using ABC, overhead costs are traced to products and services by identifying the resources, activities, and their costs and quantities to produce output. A unit of output (a driver) is used to calculate the cost of each activity. Cost is traced to the product or service by determining how many units of output each activity consumed during any given period of time. ABC does not only apply to manufacturing organisations: it is also appropriate for service organisations such as financial institutions, medical care providers, and government units. In fact, some banking organisations have been applying the concept for years under a different name – unit costing. Unit costing is used to calculate the cost of banking services by determining the cost and consumption of each unit of output of functions required to deliver the service.

    
    

    Key points

  • Activity-based costing (ABC) recognises different levels of overhead costs and generates more accurate product costs for planning purposes.

  • Activity-based management (ABM) recognises both planning and control implications of the activity costing system.

  • As organisations become more complex, they become more difficult to manage because interdependencies become less obvious.

  • ABM allows managers to have a better understanding of the relationship among different activities. • Process management identifies activities and designs the organisational structure around these activities.

  • Activities are also identified as either value-added or non-value-added depending on whether they are on the value chain.

  • To discourage non-value-added activities, large application rates can be used for the cost drivers related to those activities.

  • The choice of cost drivers is one way to turn ABM into a control mechanism.

  • An organisation may intentionally choose application rates different than the opportunity cost of using the cost driver to influence behaviour that discourages use of the cost driver.

  • If there is a fixed cost component between the activity cost and the usage of the cost driver, then there is still an incentive for overproduction.

  • ABC is most useful with product diversity, complex overhead structures, and in industries that are very competitive and require accurate product costs.

Avoidable and controllable costs (or relevant and irrelevant costs)

Avoidable costs are those costs that may be saved by not adopting a given alternative, whereas unavoidable cannot be saved.


A controllable cost is a cost that is reasonably subject to regulation by the manager with whose responsibility that cost is being identified. If a manager can control the quantity and price paid for a service, then the manager is responsible for all the expenditure incurred for the service. If a manager can control the quantity of the service but not the price paid for the service, then only that amount of difference between actual and budgeted expenditure that is due to usage should be identified with the manager. Finally if he cannot identify quantity or price paid, then the expenditure is uncontrollable and should not be identified with the manager.

Dangers of Variable Costing

The simplicity of variable costing allows management to easily understand the resulting figures. However, managers may misapply the principal of variable costing. A change to a different accounting method that gives a completely different picture under similar labels may confuse them. Although the purpose of the change in costing methods is to bring about better understanding, it may cause more confusion instead.

Another danger is that the financial manager may assign variable costing income a broader significance than it deserves. When sales substantially exceed current production, for instance, variable costing profits are higher than those under absorption costing, and management may take improper action based on these increased profits. These profits may mislead marketing executives to ask for lower prices. Managers may also demand higher employee benefits to sales bonuses when, in fact, there is no justification for such actions. At the other extreme, variable costing results may mislead management during a business recession because, when sales lag behind production during early stages, the variable costing profit will be minimised and the variable costing loss maximised. Management may miss future profit opportunities by thus misreading the severity of the recession.

When management decides to expand or eliminate activities connected with specific product lines or other specific business units, it may need to adjust income figures determined using variable costing. For example, most businesses produce or sell several products differing in ratios of variable costs to sales revenue and contribution rates. They can improve the total profit picture by eliminating the products contributing the smallest amount and by continuing to carry the products making large contributions to profit. On the other hand, this approach, too, can be misleading. If companies drop items contributing small amounts of profits, the fixed unit cost that other products must cover will increase. As a result, profits will likely decrease if the company fails to add other products to its line. A company also must consider intangible factors because a product with a low contribution margin ratio may be necessary for convenience of customers. The loss in customer goodwill that might result from dropping this item could easily offset any gain from products with higher contribution margins.

Standard costs

Standard costs are predetermined costs that are usually expressed on a per-unit basis; they are target costs, costs that should be attained. Standard costs help to build budgets gauge performance, obtain product costs and save book-keeping costs. Standard costs are the building blocks of a flexible budgeting and feedback system. It estimates the costs of production and then are compared to the actual costs. They are used for planning decisions such as pricing and outsourcing as it represents the expected future cost of a product, service, process or subcomponent and serve as a benchmark.  The difference between the actual and standard cost is called a variance. Standard costs are used for control as a form of contract among managers.

Costs and benefits of using standard costing systems:

3. Standard cost systems also create incentive problems and are not particularly timely. 4. The benefits of control and planning, however, seem outweigh the costs because many organisations are using standard costs.

ABC – Activity Based Costing

The basic distinction between traditional cost accounting and ABC is as follows: Traditional cost-accounting techniques allocate costs to products based on attributes of a single unit. Typical attributes include the number of direct labour hours required to manufacture a unit, purchase cost of merchandise resold, or number of days occupied. Allocations, therefore, vary directly with the volume of units produced, cost of merchandise sold, or days occupied by the customer. In contrast, ABC systems focus on activities required to produce each product or provide each service based on each product’s or service’s consumption of the activities.

Activity-based costing focuses on activities, or processes, rather than products or departments. Instead of categorising overhead costs by department or in total, costs are organised into pools for related activities. By using time sheets or other means, the time and resources spent for each activity accumulate into a cost pool for each activity. The next step is to choose a driver that represents how much the end product-the chip-uses each activity. The process of implementing activity-based costing can be described as follows:

The criticisms against ABC is that the analysing of the cost drivers is very time consuming, and due to the high expense incurred, the potential gain does not justify the cost. It is also criticised (as is Full Costing) that it isn’t very relevant for decision making.

How these might improve the quality of information

Managerial cost accounting is the process of accumulating, measuring, analysing, interpreting, and reporting cost information useful to both internal and external groups concerned with the way in which the organisation uses, accounts for, safeguards, and controls its resources to meet its objectives. Cost information is used for many different purposes that can be generally classified into five types:

2) cost reduction and control;

decisions to contract out work or make other changes in the methods of production or delivery of services.

Combining Variable Costing and Absorption

While reporting for external purposes must conform to generally accepted accounting principles, financial data prepared for internal uses need not. The unacceptability of variable costing for external reporting does not affect its importance and special usefulness as an analysis tool. The basic objective of costing should be to meet internal requirements. Variable costing can contribute to this objective because it overcomes many of the weaknesses in reporting with conventional absorption costing. Many companies have converted to variable costing to obtain certain advantages and have found many others not thought of initially. Variable costing need not replace absorption costing. A well-informed management needs both contribution margin analysis and full cost data in budgeting and decision making.

Using a combined approach suggests that arranging the income statement to show both an income under variable costing and the net income required for external reporting. To variable costing income, the business can add or deduct an increment measuring the effect of the change in the fixed cost components of inventory variation to arrive at conventional profits. This can distinguish income resulting only from sales that arise due to those inventory changes. One advantage of this approach is the income statement separates variable costs from fixed costs.

Having both sets of profit figures enables the executive to form judgements with much greater facility than if only profit figure were available; it also facilitates responsibility accounting by making it possible to have information by organisational level. This dual approach provides the additional information that management needs for making decisions and still follows generally accepted accounting principles. A system combining variable costing and absorption costing with standard costs and flexible budgets provides more effective cost control.

ABC

ABC is crucial because it tells managers which products or services make or lose money – they sometimes don’t know. Traditional cost allocations often depict an unrealistic, inadequate view of profitability, sometimes distorted by hundreds of percent. In most cases, ABC is designed to provide profitability information for each segment of their product/service market matrix. After learning about the specific products, services or customers that make or lose money, managers can choose an effective course of action, such as changes to price, product mix, distribution and sources of supply.

The key point with the strengths and weaknesses of all these methods is to find the most realistic method of costing, which is truly representative of the business at the present time and has the ability to be forward looking. The problem with historical data is that it does not always represent the future direction of the business and this can prove costly with dramatic effects on the company. The object of these costings is to give an indication of firstly which costs are spent where and secondly the most effective measure of allocating them to products or departments in order to establish a cost price in which to work from. The differing systems use a variety of ways of allocation with Marginal only using the Variable costs, Absorption using fixed and variable costs and Activity Based using these but allocating them by activity. The best option provided it is cost effective would be to establish the costs under each of these headings and then compare the differences with the Standard Costing (the estimated not actual costs).

With more accurate information, decisions will be more representative of the actual environment and costs likely to be incurred, thus giving a clearer more accurate image of the actual finances and budgetary control required as well as how much the running of the business and the provision of the service is in reality.

FINANCIAL RATIOS

PROFITABILITY

Return on owner’s equity (ROE) = Net profit after taxation and preference dividend (if any) / ordinary share capital plus reserves x100

Return of capital employed (ROCE) = Net profit before interest and taxation / Share capital + reserves + long-term loans x 100

Net Profit Margin Ratio = Net profit before interest and taxation / Sales x 100

Gross profit margin = Gross profit / Sales x 100

EFFICIENCY

Average stock turnover period = Average stock held/Cost of sales x 365

Average settlement period for debtors = Trade debtors / Credit Sales x 365 days

Average settlement period for creditors = Trade creditors / Credit purchases x 365

Asset turnover ratio = Sales / Total assets employed

Sales per employee = Sales / Number of employees

LIQUIDITY

Current Ratio = Current Assets / Current Liabilities (creditors due within one year)

Acid Test Ratio = Current assets (excluding stock)/ Current Liabilities

Gearing ratio = Long-term liabilities / Share capital + reserves + long-term liabilities x 100

Direct Materials Price Variance

A variance is the difference between planned, budgeted or standard cost and the actual costs or revenues received. Variance analysis is to measure performance, correct inefficiencies, deal with the accountability function. When a variance is worse that the budgeted or standard cost it is said to be adverse and it is an accounting convention that adverse variances are shown in brackets. If the costs and revenues are better than the budgeted or standard costs the variance is favourable.

Direct Materials Price Variance

This is defined as the difference between the standard price and the actual purchase price for the actual quantity of the material. This can be calculated at the time of delivery or at the time of usage. It is best to calculate whether or not a variance has occurred when the material is delivered. It is also good accounting practice to write off or add to profit any variance which has occurred at the earliest opportunity.

Formula for Calculating whether or not a variance has occurred

Actual Quantity Purchased x (Standard Price – Actual Price)

Causes of Material Price Variances

In the case of materials, an adverse price variance usually means that a supplier has increased the price of the goods after the standard has been set. If prices are rising because of inflation there is little the firm can do. Whenever the purchasing department place a large order with one supplier an attempt should be made to fix a price for the life of the contract. This may not always be possible due to inability to meet minimum order levels and does not become entitled to discounts. This type of situation shows standards are predictions and are a measure of forecasting rather than a measure of operating efficiency.

Direct Material usage Variance

This is the difference between the standard quantity specified for the actual production and the actual quantity used, at standard purchase price. It is calculated using the following formula:

(Standard Quantity specified for actual production – Actual Quantity used) x Standard Price

Causes of Usage Variances

Management should be able to control usage variances because the difference will have taken place within the firm. Often the variance will have been brought about by carelessness, e.g. incorrect storage which could lead to spillage o deterioration. It may also have occurred because of careless usage or the workforce being unskilled or inexperienced in using the material. Lastly the materials used may have been of poor quality. This often brings about a high usage variance as many of the units produced will fail to meet the required quality levels and will therefore have to be scrapped.

Direct Labour Variance

This is the difference between the standard direct labour cost and the actual direct labour cost incurred for the production achieved. By doing this calculation, the hours worked or actually booked to the job can be compared with the actual standard hours produced at the end of the programme of work. The variance is calculated using the following formula:

(Standard direct labour hours produced x Standard rate per hour)
less
(Actual direct labour hours worked x Actual rate per hour)

Direct Labour Rate Variance

This is defined as the difference between the standard and the actual direct labour rate per hour of the total hours worked/paid. The variance is calculated by the following formula:
(standard rate per hour – Actual rate per hour) x Actual hours worked/paid.

Causes of Labour Rate Variances

Labour rate variances need not arise if standards are based on the current union negotiated pay rates. Sometimes the standards are set before the pay rates have been negotiated and so it is important for management to identify the difference between the standard rate and the agreed settled rate. If this is not the case other causes must be investigated. Temporary labour may also have been used and they may have been paid a t a different rate. Lastly, special allowances may have been paid to staff for overtime etc which will effectively increase the hourly rate.

Direct Labour Efficiency Variance

This is the difference between the standard hours for the actual production achieved and the hours actually worked, valued at the standard labour rate. It is calculated by the formula:
(Standard hours produced – actual hours worked) x Standard rate per hour.

Causes of Efficiency Variances

Inadequate training may be responsible for the variance. If the workers are inexperienced they usually take longer to do the job or there may be quality problems resulting in more rejects being produced. The cause could also be due to poor quality materials being purchased because the usual source is temporarily out of stock.

Overhead Variances

The variable overheads will be activity related whereas the fixed overheads will be time related. An overhead expenditure variance is defined as the difference between budgeted and actual overhead expenditure.

Fixed overheads are calculated using the following formula:
Fixed overhead budgeted cost – Actual conversion overhead incurred.

Variable overheads are calculated as follows:
(Actual units produced x variable overhead absorption rate per unit) less actual stock.

Variance investigation

1. A variance by itself seldom provides sufficient information for making good decisions.
2.  A manager is usually uncertain whether a variance is caused by a problem or is a random fluctuation.
3.  Aggregating variances over time provides managers with more confidence about the origins of the variance.
4.  To understand the cause of a variance, a manager must investigate the source of the variance.
5.  Investigation is costly so not every nonzero variance should be investigated.
6.  Factors affecting the decision to investigate include the size of the variance, the opportunity cost of investigation, the opportunity cost of not investigating, and the ease of correcting the problem if it exists.

 Factors affecting the decision to investigate include the size of the variance, the opportunity cost of investigation, the opportunity cost of not investigating, and the ease of correcting the problem if it exists.

Setting a standard cost for a cost unit follows much the same procedures as preparing a job cost, except that planned figures are used in lieu of actuals. For any given cost unit the following standards must be set:

Standard direct material costs – This calls for setting standard material specifications, the standard usage per unit of each kind of material used, the standard price of these materials and the standard material mix ratios and losses expected (standard yield) if process work is involved. The price standard will be made up of prices obtained, negotiated and agreed with suppliers. This agreed price may take into account any future short term increase. If this applies then the final standard will be based upon the mean of a range prices likely to prevail during the time that the standard is operational. The standard must also make allowances for normal loss, defective material, storage, deterioration, theft and wastage that may occur during the production process. This amount should be added to the figure for planned usage. Lastly for many firms operating in fast moving consumer goods market the packaging forms an important part of the promotional mix and this added cost must be taken into consideration when setting the standard cost.

Standard direct wage costs – This sets standard labour grades (i.e. the grades of labour to be employed on making the units), the standard labour times per unit of each grade of labour employed and the standard wage rates of those grades. Most companies set their wage costs after negotiations with the relevant trade union. With the introduction of set period contracts, this part of the standard setting process has become easier because the labour rate is already known. However the main problem occurs when calculating the time needed to perform a task as this varies according to worker motivation and level of skill together with the type of machinery used.

If a firm is to control its labour costs the time taken to complete a task should be recorded. An allowance must be built into the labour cost standard to take account of operator’s fatigue, together with a contingency allowance for reading diagrams and cleaning machinery. If new products are being made the company should also set a reject allowance to take account of problems brought about by the introduction of new manufacturing processes. When making these allowances care must be taken that they are set at an equitable level or cost overruns will be incurred which could add between 10 and 15 per cent to total labour costs.

Standard direct expenses – Sets the unit cost of any direct expenses incurred in producing or selling the units.

It is possible to split the conversion overhead into its fixed and variable components although in practice this is rarely done.

Standard factory overhead costs – Sets pre-determined rates in respect of the variable and fixed overheads and ten using these rates to compute the variable and fixed overhead costs per unit of production.

Standard factory variable overhead costs – Involves ascertaining how many units of activity the cost unit uses and multiplying this figure by the variable overhead rate per unit of activity (standard variable overhead rate) taken from the flexible budget.

Standard factory fixed overhead cost – Setting this cost calls for a standard fixed overhead rate, determined by dividing the budgeted units of activity into the budgeted fixed overhead cost found in the flexible budget.

Standard selling and distribution overhead costs – This is set in the same way as the unit standard manufacturing overhead costs.

Standard selling price and standard sales margin – Finally the planned, standard, unit selling price is set and by deducting from this the total unit standard price, the unit standard sales margin is found. This is either known as standard profit or standard contribution.

All the above data should be recorded on a standard cost card which forms a complete record of all the costs standards and standard costs relating to that unit. It is important for valuing work in progress. Once all the information has been collected and staff have been consulted and involved in the process the firm’s management can compare actual and standard costs. This is referred to as a variance analysis.

Costs of using standard costing systems:

1. Standard cost systems are costly to implement and operate.
2. Standards must be updated frequently.
3. Standard cost systems also create incentive problems and are not particularly timely.
4. Standard costing has been criticised for 2 main reasons – Activity based costing has highlighted how costs change with activity and secondly, target costing, sometimes called Kaizen costing has proved to be very effective in controlling costs in new product design and development. Kaizen costing seeks to reduce actual costs to below their standard costs and is therefore the exact opposite of standard costing which seeks to ensure that actual costs are the same as standard. There is a danger that standard costing systems fail to reduce costs in the long-term, thereby depriving the firm of a cost competitive advantage in the market place.

Benefits of using standard costing systems:

Control – the system provides a yardstick against which actual operations and their costs can be measured.

Efficiency and economy – the process of setting standards involves examining and stetting down the technical standards of the business. This can mean establishing the best materials and methods which can lead to greater efficiency, the most economic mixture of materials and methods or both.

Cost consciousness – The standards provide a common language for talking about cost as well as a target of efficiency that everyone can strive after.

Exception – Management by exception allows managers to concentrate on those few things that need their attention rather than all the things that are happening according to plan. The variances shown up b standard costing provide those exceptions.

Responsibility – The different kinds of variance point to the areas where responsibility for them lies – material price being the responsibility of Purchasing, material usage that of Manufacturing, and so on. Further subdivision, to different production cost centres, for instance clearly defines who is responsible for the exceptions from the expected results.

Policies – Management policies can be based on standard costs with everyone knowing that the underlying technical standards have been defined objectively. They can know exactly what has been allowed for and what has not. This makes decisions based on costs more rational and the costs can be a guide to such actions as price setting.

Simplicity – Costing procedures can be simpler once price and rate variances have been extracted (and their extraction can be almost automatic). Stock records do no t involve the same complications that FIFO or Average costs require for calculating issue prices. When stocks and work in progress have to be valued, standard cost make it simpler. Monthly accounts can be produced more quickly and even before calculating the variances, knowing the standard profit on actual sales in the period can be a useful guide to performance.

Other benefits include:

1. Simplify accounting – particularly inventory accounting
2. Preparation of budgets or estimates
3. Developing product strategy
4. Measuring performance

Control of the finances of a business is critical to a companys survival, growth and profitability. Key factors are setting out trading and cash flow budgets for the business over the twelve month cycle and regular monitoring of performance and updating of budgets. However, many businesses are too busy with day-to-day activities and administration to do this thoroughly, if at all.

In order to take good management decisions, the Directors of a company need to have accurate, up to date and realistic forecasts of their sales, purchases, overheads, gross margins, net margins and cash flow. Critical decisions about the future of the company, such as levels of employment, investment, salaries, sales, stock levels, debtors and creditors, overdraft requirements etc. should be made with up to date financial information, not just based mainly on gut feel and instinct. Without enough cash in the system, poor performing companies can go under while businesses performing profitably can see their growth restricted.

Trading forecasts should be updated and reassessed continually in line with actual performance so that the company knows where it is heading as the year goes by, not getting a shock several months afterwards when the auditor or accountant puts the figures together. Ideally, budget monitoring should be on a monthly or quarterly basis, but companies unable to commit to this should consider having their financial forecasting externally and objectively updated and analysed AT THE VERY MINIMUM once a year in order to retain a degree of control on the business.

Financial Health-Check Stages Include:

* Analysis of Sales Levels
* Gross Margin Analysis
* Cost of Sales Analysis
* Review of Individual Overheads
* Depreciation Analysis
* Net Margin Analysis
* Stock Level Analysis
* Overdraft Levels
* Additional Funding Requirements
* VAT and Dividend Timing

PLUS – Profit & Loss and Cash Flow Budgets complete with independent recommendations
PLUS – Fax and e-mail support for 12 months for independent budgeting advice

With growing awareness of the dangers of global warming, instruments like carbon credits and carbon offset are turning increasingly popular with individuals as well as businesses as a successful means to safeguard our planet.

If you want to compensate for the degrading effects your activities have had on nature, you can purchase a certain amount of carbon offset in order to nullify the damage caused by you. The money you spend on a carbon offset will help fund green projects like wind farms that produce energy without resulting in dangerous emissions.

Before venturing into carbon offset, you must first look at your daily actions that lead to release of greenhouse gases. Common activities that result in a substantial proportion of carbon emissions for most people are use of cars, air travel, and household energy.

Once you have made a list of all these actions, you should think of which of those you can reduce or completely do away with. Doing this would enable you to immensely reduce your role in polluting the planet. For example, you can reduce emissions by driving less often, using fluorescent lamps, and installing better insulation to lower energy usage on heating or cooling.

After you have thought about all the aspects where you can act effectively towards reducing emissions, you must calculate the impact of your remaining activities on the environment, i.e., estimate your balance carbon footprint. The method of calculating this footprint varies from one action to another, but there are a lot of online calculators which can be of great help in this regard.

When you purchase an offset, the offset providers balance your carbon footprint by reducing emissions at any region in any nation. You can put your money in one of the environmental projects offered by the offset providers, and each project has its own way of emission control. However you have to be careful while making this selection. You must only put your money in recognised and authentic projects to avoid the possibility of the funds being misused. Numerous certifying bodies conduct extensive tests on authenticity and efficacy to certify projects, and it is always a sensible idea to put money in a certified and authentic project.

Finally, you must gather adequate information on the topic from various sources. It will help you find out who the most authentic offset providers are, what kind of projects are most suitable for an investment, and how to monitor the progress of the project that you have put your money in.

Learn more about carbon credits and carbon offset and get a deeper understanding on how you can help in saving the environment. Get a totally unique version of this article from our article submission service

Discovering the ‘thumbscrews’ of investors is crucial to getting them to take action. In over a decade of dealing with global investors there are several elements that I’ve discovered to be universal truths about the mind of the private investor (angel investor, accredited investor).

When talking to an investor for the first time, it’s more important to listen than to speak. It’s more important to ask questions than answer them. It’s more important to discover their needs and wants than to exclaim your own. Your first conversation with an investor should be all about piercing the armor and finding the trigger points that prompt a reaction that gets to the center of their ‘childlike’ state.

What I mean by this is, investors, just like anyone else, has insecurities that are rooted in their childhood and what they are outwardly today, is typically a polar opposite of what they are on the inside. For example, an arrogant, chest beater seems proud and obnoxious on the outside but the reality is that they are over compensating for an insecurity that is rooted in an individual or collection of childhood incidents.

Maybe they were made fun of as a child, maybe they’re father was verbally abusive, maybe their teachers would single them out in class opening them up to playground mockery. When talking to these individuals it’s important to listen to their voice and intonation when the conversation topic changes. Take notes on their psychological adjustments to the conversation. After you feel you have discovered the triggers that induce the ‘pleasurable’ responses, end the call, and set your second phone appointment with them.

On that second call, you want to have your conversation ready to go using the triggers you found in the first conversation. Play off of those insecurities that you found, become their best friend without being chummy but it is your mission on this call to be the “guy that understand me” to the investor. You want the overall tone of this conversation to have the response from your target along the theme of, “wow, this guy gets me” , “I can see investing in this company”.

By using this method and not coming across as ‘fake’, you have become an investment opportunity and a shrink all rolled into one. You want to be the one person that this investor can lower his guard to because everything he says, you seem to be the one person who understands him at his deepest level. You seem to naturally be tuned into his insecurities, emotions, needs and wants. Sound strange? Try this out on the next investor you talk to, I guaranty you will be shocked with the results.

For Corporate Consulting or Investor Finder Services, call Princeton Corporate Solutions at 267-233-0183Take Your Company Public the easy way!

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Costing your goods and/or services:

Setting a standard cost

Setting a standard cost for a cost unit follows much the same procedures as preparing a job cost, except that planned figures are used in lieu of actuals.  For any given cost unit the following standards must be set:

Standard direct material costs -

This calls for setting standard material specifications, the standard usage per unit of each kind of material used, the standard price of these materials and the standard material mix ratios and losses expected (standard yield) if process work is involved.  The price standard will be made up of prices obtained, negotiated and agreed with suppliers.  This agreed price may take into account any future short term increase.  If this applies then the final standard will be based upon the mean of a range prices likely to prevail during the time that the standard is operational.  The standard must also make allowances for normal loss, defective material, storage, deterioration, theft and wastage that may occur during the production process.  This amount should be added to the figure for planned usage.  Lastly for many firms operating in fast moving consumer goods market the packaging forms an important part of the promotional mix and this added cost must be taken into consideration when setting the standard cost.

Standard direct wage costs -

This sets standard labour grades (i.e. the grades of labour to be employed on making the units), the standard labour times per unit of each grade of labour employed and the standard wage rates of those grades.  Most companies set their wage costs after negotiations with the relevant trade union.  With the introduction of set period contracts, this part of the standard setting process has become easier because the labour rate is already known.  However the main problem occurs when calculating the time needed to perform a task as this varies according to worker motivation and level of skill together with the type of machinery used.

If a firm is to control its labour costs the time taken to complete a task should be recorded.  An allowance must be built into the labour cost standard to take account of operator’s fatigue, together with a contingency allowance for reading diagrams and cleaning machinery.  If new products are being made the company should also set a reject allowance to take account of problems brought about by the introduction of new manufacturing processes.  When making these allowances care must be taken that they are set at an equitable level or cost overruns will be incurred which could add between 10 and 15 per cent to total labour costs.

Standard direct expenses –

Sets the unit cost of any direct expenses incurred in producing or selling the units.

It is possible to split the conversion overhead into its fixed and variable components although in practice this is rarely done.

Standard factory overhead costs -

Sets pre-determined rates in respect of the variable and fixed overheads and ten using these rates to compute the variable and fixed overhead costs per unit of production.

Standard factory variable overhead costs -

Involves ascertaining how many units of activity the cost unit uses and multiplying this figure by the variable overhead rate per unit of activity (standard variable overhead rate) taken from the flexible budget.

Standard factory fixed overhead cost –

Setting this cost calls for a standard fixed overhead rate, determined by dividing the budgeted units of activity into the budgeted fixed overhead cost found in the flexible budget.

Standard selling and distribution overhead costs – This is set in the same way as the unit standard manufacturing overhead costs.

Standard selling price and standard sales margin – Finally the planned, standard, unit selling price is set and by deducting from this the total unit standard price, the unit standard sales margin is found.  This is either known as standard profit or standard contribution.

All the above data  should be recorded on a standard cost card which forms a complete record of all the costs standards and standard costs relating to that unit.  It is important for valuing work in progress. Once all the information has been collected and staff have been consulted and involved in the  process the firm’s management can compare actual and standard costs.  This is referred to as a variance analysis.

Costs of using standard costing systems:

Standard cost systems are costly to implement and operate.

Standards must be updated frequently.

Standard cost systems also create incentive problems and are not particularly timely.

Standard costing has been criticised for 2 main reasons – Activity based costing has highlighted how costs change with activity and secondly, target costing, sometimes called Kaizen costing has proved to be very effective in controlling costs in new product design and development.  Kaizen costing seeks to reduce actual costs to below their standard costs and is therefore the exact opposite of standard costing which seeks to ensure that actual costs are the same as standard.  There is a danger that standard costing systems fail to reduce costs in the long-term, thereby depriving the firm of a cost competitive advantage in the market place.

Benefits of using standard costing systems:

Control –

the system provides a yardstick against which actual operations and their costs can be measured.

Efficiency and economy –

the process of setting standards involves examining and stetting down the technical standards of the business.  This can mean establishing the best materials and methods which can lead to greater efficiency, the most economic mixture of materials and methods or both.

Cost consciousness –

The standards provide a common language for talking about cost as well as a target of efficiency that everyone can strive after.

Exception -

Management by exception allows managers to concentrate on those few things that need their attention rather than all the things that are happening according to plan. The variances shown up b standard costing provide those exceptions.

Responsibility –

The different kinds of variance point to the areas where responsibility for them lies – material price being the responsibility of Purchasing, material usage that of Manufacturing, and so on.  Further subdivision, to different production cost centres, for instance clearly defines who is responsible for the exceptions from the expected results.

Policies –

Management policies can be based on standard costs with everyone knowing that the underlying technical standards have been defined objectively.  They can know exactly what has been allowed for and what has not.  This makes decisions based on costs more rational and the costs can be a guide to such actions as price setting.

Simplicity –

Costing procedures can be simpler once price and rate variances have been extracted (and their extraction can be almost automatic).  Stock records do no t involve the same complications that FIFO or Average costs require for calculating issue prices.  When stocks and work in progress have to be valued, standard cost make it simpler.  Monthly accounts can be produced more quickly and even before calculating the variances, knowing the standard profit on actual sales in the period can be a useful guide to performance.

Variance Analysis between budgeted and actual costs:

Variance Analysis

A variance is the difference between planned, budgeted or standard cost and the actual costs or revenues received.  When a variance is worse that the budgeted or standard cost it is said to be adverse and it is an accounting convention that adverse variances are shown in brackets.  If  the costs and revenues are better than the budgeted or standard costs the variance is favourable.

Direct Materials Price Variance

This is defined as the difference between the standard price and the actual purchase price for the actual quantity of the material.  This can be calculated at the time of delivery or at the time of usage.  It is best to calculate whether or not  a variance has occurred when the material is delivered. It is also good accounting practice to write off or add to profit any variance which has occurred at the earliest opportunity.

Formula for Calculating whether or not a variance has occurred

Actual Quantity Purchased x (Standard Price – Actual Price)

Causes of Material Price Variances

In the case of materials, an adverse price variance usually means that a supplier has increased the price of the goods after the standard has been set.  If prices are rising because of inflation there is little the firm can do.  Whenever the purchasing department place a large order with one supplier an attempt should be made to fix a price for the life of the contract.  This may not always be possible due to inability to meet minimum order levels and does not become entitled to discounts.  This type of situation shows standards are predictions and are a measure of forecasting rather than a measure of operating efficiency.

Direct Material usage Variance

This is the difference between the standard quantity specified for the actual production and the actual quantity used, at standard purchase price.  It is calculated using the following formula:

(Standard Quantity specified for actual production – Actual Quantity used) x Standard Price

Causes of Usage Variances

Management should be able to control usage variances because the difference will have taken place within the firm.  Often the variance will  have been brought about by carelessness, e.g. incorrect storage which could lead to spillage o deterioration.  It may also have occurred because of careless usage or the workforce being unskilled or inexperienced in using the material.  Lastly the materials used may have been of poor quality.  This often brings about a high usage variance as many of the units produced will fail to meet the required quality levels and will therefore have to be scrapped.

Direct Labour Variance

This is the difference between the standard direct labour cost and the actual direct labour cost incurred for the production achieved.  By doing this calculation, the hours worked or actually booked to the job can be compared with the actual standard hours produced at the end of the programme of work.  The variance is calculated using the following formula:

(Standard direct labour hours produced x Standard rate per hour)

less

(Actual direct labour hours worked x Actual rate per hour)

Direct Labour Rate Variance

This is defined as the difference between the standard and the actual direct labour rate per hour of the total hours worked/paid.  The variance is calculated by the following formula:

(standard rate per hour – Actual rate per hour) x Actual  hours worked/paid.

Causes of Labour Rate Variances

Labour rate variances need not arise if standards are based on the current union negotiated pay rates.  Sometimes the standards are set before the pay rates have been negotiated and so it is important for management to identify the difference between the standard rate and the agreed settled rate.  If this is not the case other causes must be investigated.  Temporary labour may also have been used and they may have been paid a t a different rate.  Lastly, special allowances may have been paid to staff for overtime etc which will effectively increase the hourly rate.

Direct Labour Efficiency Variance

This is the difference between the standard hours for the actual production achieved and the hours actually worked, valued at the standard labour rate.  It is calculated by the formula:

(Standard hours produced – actual hours worked) x Standard rate per hour.

Causes of Efficiency Variances

Inadequate training may be responsible for the variance.  If the workers are inexperienced they usually take longer to do the job or there may be quality problems resulting in more rejects being produced.  The cause could also be due to poor quality materials being purchased because the usual source is temporarily out of stock.

Overhead Variances

The variable overheads will be activity related whereas the fixed overheads will be time related.  An overhead expenditure variance is defined as the difference between budgeted and actual overhead expenditure.

Fixed overheads are calculated using the following formula:

Fixed overhead budgeted cost – Actual conversion overhead incurred.

Variable overheads are calculated as follows:

(Actual units produced x variable overhead absorption rate per unit) less actual stock.

FINANCIAL BUDGETS – Are a budgeting system to assist in the financial and operating forecasts for the short, medium and long term periods.

Definition of Budget

‘A budget is a quantitative expression for a set time period of a proposed future plan of action by management’.  The planning element of a budget looks forward attempts to predict the future demands placed on the organisation.  It forces a business to ensure that the required resources are available as required and must consist of those 4 key elements to determine the needs of the business:

• Quantitative - The budget must consist of quantities to reflect all aspects from production to sales.
• Economic - Consideration should be given to both monetary terms and the resources/ utilities involved.
• Plan - A budget is a plan, not a hope or forecast but an authoritative intention.
• Time – Always represented over a period of time, ranging from daily to five yearly.

THE PROCESSING/MANAGING OF THE BUDGET, WHO WILL CONTROL IT AND ENSURE THE INFORMATION IS PRODUCED ON TIME

Administration procedures should be introduced to ensure the budget process works effectively which mean the procedures should be tailor made to the requirements of the organisation and certain procedures introduced in order that the  budgets are approved by the relevant managers and the appropriate support staff are available to back up these procedures.

The introduction of a budget committee which should consist  of high level executives who represent major segments (or department heads) of the business, ie the Managing Director, the Accountant, the Workshop Manager, the Warehouse Manager, the Retail Manager, the Mail Order Manager and the Head of Administration.  The major task will be to ensure that budgets are realistically established and properly coordinated.  Standard procedure is for the functional (department) heads to submit their relevant budgets to the committee for approval.  If it doesn’t reflect a reasonable level of performance, a review will be required with a re-adjustment which will be re-submitted for approval.  The section head who’s initial budget is being rejected must agree with the decision that the new budget can be achieved, otherwise it will not act as a motivating device.

The committee should appoint a budget officer, who is usually the accountant.  This person is responsible for the co-ordination of individual budgets into a budget for the whole organisation ( a master budget), so the budget committee can see the impact of an individual budget on the organisation as a whole.  A budgeting manual should be prepared by the accountant and will describe objectives and procedures involved in the budgeting process as well as providing a useful reference source for managers responsible for budget preparation.  It may also include a timetable specifying the order in which the budgets should be prepared and the dates when they should be submitted to the committee.  This manual should then be circulated to all individuals who are responsible for preparing budgets.

Budgetary Planning and Control:

Budgeting is about making plans for the future, implementing those plans and monitoring activities to see whether they conform to the plan.  To do this successfully requires full top management support, co-operative and motivated middle managers and staff, and well organised reporting systems.  Control – this aspect of budgeting is the most well known and is the aspect most frequently encountered by the ordinary staff member.  The process of comparing actual results with planned results and reporting on the variations, which is the principle of budgetary control, sets a control framework which helps expenditure to be kept within agreed limits. Deviations are noted so that corrective action can be taken.

Planning and co-ordination

The formal process of budgeting works within the framework for long term, overall objectives to produce detailed operational plans for different sectors and facets of the organisation. Planning is the key to success in business and budgeting forces planning to take place.  The budgeting  process provides for the co-ordination of the activities and departments of the organisation so that each facet of the operation contributes towards the overall plan.  This is expressed in the Master Budget.

Communicating details of the budget policy

Top management must communicate the policy effects of the long term plan to those responsible for preparing the current years budgets.  It is important for top and middle management  to communicate with regard the firm’s objectives and the practical problems of implementing these objectives and when the budget is finalised, it communicates the agreed plans to all the staff involved.  Full liaison between sales and production functions must also be developed.

Determining the factor that restricts performance

In every organisation there is some factor that restricts performance for a given period.  In the majority of organisations this factor is sales demand.  It could however be production and therefore is important for top management to determine the factor that restricts performance, since this factor determines the point at which the annual budgeting process should begin.

Budgets:

Negotiation of budgets

To implement a participative approach to budgeting, the budget should be originated at the lowest level of management.  The managers at this level should submit their budget to their superiors for approval.  The superior then incorporates this with the other budgets for which he or she is responsible and submits this budget for approval to his superior. This employs a bottom up preparation and a top down approval by senior management.  At every stage deadlines should be imposed and accurate information used in order to ensure that target dates are reached and data is as accurate as possible as an incompetent manager could have adverse effects on the business’ cashflow and future success. Past performance may be used as a starting point but does not determine what will happen the future.  An essential preliminary to making plans and budgets is to prepare forecasts.

Accounting staff will usually assist managers in the preparation of their budgets, e.g. circulate and advise on the instructions about budget preparation, provide past information that may be useful for preparing the present budget, and ensure that managers submit their budgets on time.  These staff do not determine the content of the various budgets but act in an advisory capacity and provide clerical assistance for line managers.

Final acceptance of budgets

When all the budgets are in harmony with each other, they are summarised into a master budget consisting of a budgeted profit and loss, a balance sheet and a cash flow statement.  After the approval of the master budget the budgets are the passed through the organisation to the appropriate responsibility centre.  The approval of the master budget is the authority for the manager of each responsibility centre (or department manager) to carry out the plans contained in each budget.

STANDARD COSTING  and VARIANCES for businesses

Pricing techniques - there are several in practice that are used in business today and these are explained below:

FIFO -(First in, first out)

Using this system, we assume that components are used in the order which they are received from the suppliers.  The components issued to production are deemed to have formed part of the oldest consignment still unused and are costed accordingly.

LIFO -(Last in, first out)

This involves the opposite assumption, that components issued to production originally formed part of the most recent delivery, while older consignments lie in the bin undisturbed.

Average Cost –

As purchase prices change with each new consignment, the average price of components in the bin is constantly changing.  Each component in the bin at any moment is assumed to have been purchased at the average price of all the components in the bin at that moment.

Replacement Cost -

The arbitrary assumption is made that the cost at which the stock unit was purchased is the amount it would cost to replace it.  This is often the unit cost of stocks purchased in the next consignment following the issue of the component to production.  For this reason a method which produces similar results to replacement costs is called NIFO – “next in first out”.

Standard Cost –

A pre-determined standard cost is applied to all stock item.  If this standard price differs from the price actually paid during the period it will be necessary to write off the difference as a variance in the profit and loss account.

The one being detailed in this instance is  Standard Cost:

Standard costs

A standard cost is a cost plan relating to a single cost unit.  It covers all aspects of the cost plan including the planned sales margin and selling price.  Standard costs estimate the costs of production and then are compared to the actual costs. They are used for planning decisions such as pricing and outsourcing as it represents the expected future cost of a product, service, process or subcomponent and serve as a benchmark.  The difference between the actual and standard cost is called a variance. Standard costs are used for control as a form of contract among managers, as once these variances are detected they allow the managers to take corrective action.

Standard costing systems, therefore support the budgetary control process, but unlike budgets, comparisons can be made with standard costs as the firm is producing the goods.  If standards are set for a firm’s direct and indirect costs comparisons can be made with actual and planned results.  Standards can be set for direct  materials, both price and usage, for direct labour and for indirect fixed or variable overheads.  The difference between the goal set and the results achieved can then be analysed and the reason communicated to the relevant departments.  A standard costing system will only be effective in controlling costs if management analyse the reason for the variance.  In itself the variance just shows that a difference has occurred.  It is the analysis of the variance which will reveal the reason for the difference and it is only then that management are able to decide what action to take.  The variance may be adverse, meaning the costs or usage are more than the standard envisaged or less in which case they are referred to as favourable.

Benefits of a Standard Costing System

It is expensive and time consuming to install a system of standard costing and if the costs involved are to be justified the firm must gain the following benefits:

Unit costs should be reduced because of improvements made in controlling costs.

Stock control procedures should be simplified because stock and work in progress can be valued at its standard cost.  This makes stock control easier because stock need not be valued on a LIFO or FIFO basis or any other method such as average cost (these methods were explained earlier).

Price setting should be improved because the firm has accurate details about its costs.

The system highlights variances from standards and so management are able to concentrate on that analysis.  There is therefore no need to spend time analysing costs which are performing to standard and so the system is often said to allow management by exception.

The business can benefit from establishing new working practices by reconsidering working practices before the standards are set.

Setting the standards:

The Chartered Institute of Management Accountants defines four different types of standard.  They are the basic standard, ideal standard, normal standard and the current standard.  It is the management who must decide which is the most appropriate for the business.

Basic Standard

This is defined as a standard established fur use over a long period from which a current standard can be developed.  Such a standard could remain unchanged for a long time but if this is the case, it will be useless as an effective short-term attention directing control tool.  Inflation, competition and new technology have meant that management must adapt to a changing business environment if their company is to survive today’s competitive pressures.  While a basic standard may be of interest to see what extent prices of commodities, goods or services have changed over a period of time, it is ineffective as a meaningful control tool unless coupled to a costly and complicated two-tier standard costing system.  Some company’s set a base standard for long-term comparisons, while at the same time using a current standard for current operational control.

Ideal standard

A standard which can be attained under the most favourable conditions.  Some managers believe that if a standard is set, assuming that all waste and inefficiency have been eliminated from the system, that the actual costs should be the same as the  standard cost.  No allowance is made for human error, machine breakdowns or wastage.  Advocates of such a system believe that the resulting unfavourable variances will remind management of the on-going continual need for improvement in all phases of operations and that there can be no room for complacency within the organisation.

This approach contradicts many behavioural scientists’ views that the setting of such variances is self destructive and dysfunctional since they actually remove motivation, for workers believe that the targets are unrealistic and unachievable.

The use of ideal standards may however be appropriate in new hi-tech factories where highly automated production processes controlled by computers can virtually guarantee continuous high quality output.  In such cases adverse variances are likely to be reduced to levels which are almost immaterial and may be so small as not to need investigating.

Normal Standard

A standard which can be attained if a standard unit of work is carried out efficiently, a machine properly operated or material properly used.  Such a standard makes allowances for normal wastage, machine breakdown or operator failure.  This standard represents future performance and objectives which are reasonably attainable and is sometimes called the attainable standard.  It has the added benefit in that it can be used for other purposes such as budgeting and inventory control.  This is possible because the standard is attainable under normal circumstances and can be legitimately used for other purposes.

The current standard

This is defined as a standard established for the use over a short period of time, related to current conditions.  Many business people use the term current standards for the standard currently set by the firm but this is incorrect.  The current operations standards which are used during the accounting or budgeting period will be the attainable or normal standards; while the current standard is the one used in abnormal operating conditions, as it recognises current problems an works within the present conditions.

Before a standard costing system can be installed it is necessary to build up the costs for each individual component or product.

Cost standards

Every cost consists of a usage component and a price component.  Consequently when planning a cost it is necessary to plan both the usage and the price.  Often it is necessary to plan other factors such as the specification of material, or grade of the labour, or  loss in process.  Such a planned figure is called a “cost standard” which can therefore be defined as a usage, price or other standard upon which a standard cost is based.  It will be against these standards that actual costs are compared.  Each standard must provide a target for achievement, provide a yardstick which can be used to evaluate performance and lastly to highlight the aspects of the business not going to plan.

The diagram shows that the  cost accountant must gather a great deal of detailed information from various sources before the standards can be set.  Once this has been done further information will be required because the standards will have to be reviewed to take account of the firm’s product mix, changes in material and labour costs and productivity improvements.  Setting standards is an on-going process because the standards must reflect the current costs and operating efficiencies.

When setting standards there are three elements and these are materials, labour and overheads and these can be further split: