7 Cost information

You might now be beginning to see the need for a costing system. Such a system relates production costs to activities – in this example, window production – and, in a commercial context, it enables us to establish the profitability of the activities. In the public sector or in a not-for-profit organisation, it provides the means of assessing the cost of providing a service or supplying a product.

Once management knows the level of activity, it can take a much more informed view of its operations. In the real world, accountants and managers would need to learn much more about the nature of the total cost of production of £1,800,000 for the window producer. For example, they would want to know how much the materials for the frames cost, how much the fittings cost, the cost of finishing and the charge for assembly labour, as well as the factory’s expenses.

This simple example considered cost in a manufacturing context. If the organisation provided a service, similar information in terms of the cost of service delivery would be required. The precise nature of the cost information would depend on the purpose for which the cost information was to be used.

The next section will consider the ways in which we both classify costs and summarise them to provide meaningful insights into the effective (and ineffective) management of an organisation.