6 Why organisations need costing systems
As certain activities will have the same types of costs irrespective of the individual organisation, entities in the same trade or sector may have very similar cost structures. In the public sector, for example, hospital trusts will all have similar costs and this drives the way in which they collect and report cost information. In higher education, the government-financed funding councils specify how costs are to be reported.
The need to comply with public sector external reporting requirements focuses organisations on determining the costs that have to be identified to meet those requirements. This is also the case for commercial and not-for-profit organisations. The way they calculate their costs is governed, to some extent at least, by the external reporting requirements of their sector and the regulators concerned. See the Charity Commission for England and Wales [Tip: hold Ctrl and click a link to open it in a new tab. (Hide tip)] , for example.
The accurate measurement of cost for any organisation is also important for several other reasons, including:
- providing a basis for assessing past performance
- planning for future operations
- pricing purposes
- monitoring actual performance against budget
- assisting in decision making
- assisting in cost reduction and control.
In the next activity you will consider these factors in more detail by looking at the case of a window manufacturer supplying standard products to the house-building industry.
Activity 6 Decision-making information
(a) What cost information does the window manufacturer’s management require?
Feedback
The cost information that the window manufacturer’s management requires depends on the purpose and level of decision making. For example, for strategic decisions, such as whether to expand the product range or enter new markets, management would need information about the market demand, prices customers may be willing to pay, and the costs of different types of windows (such as uPVC, aluminium, or timber). For operational decisions, such as how to allocate resources, management would need information about the production process, the materials and labour costs etc. An important source of information that management uses is about costs. While this information would be captured by the financial reporting system, managers need more detailed management accounting information, such as profitability of individual products, budget variances and so on.
(b) How does the window manufacturer assess past operations and future plans?
Feedback
The window manufacturer would probably assess both past operations and future plans by calculating gross profit and net profit, two terms we consider next.