April 22, 2016

Cost Center Reports and Analysis

Cost Center Reports and Analysis

Any activity can be analysed by its costs and the ’output’ it generates. A business might want to know the
cost of running a production line compared to other production lines or ways of producing things.
Similarly, a firm might want to look at the total cost of running training courses (salary, rents, training materials, utilities and so on) compared to the number of people actually trained.

Cost centre analysis tries to attribute all costs involved in a particular activity to one ’location’ or ’cost centre’. To calculate costs involved in a particular activity it is necessary to calculate the cost of:

All materials used directly  and materials used indirectly (for instance packaging).

All labour costs directly involved and the proportionate cost of any supporting labour (for instance
administrative staff).

Sales And Marketing Costs
Regular, on-going costs of advertising and promotion of that activity’s product or service.

Proportionate costs of regular expenses associated with that activity such as rent, rates, power, interest repayments, other charges.

Additional Costs
Other costs solely attributable to the activity (for instance higher insurance costs for a new machine).

ABC Novelties company  management want to know the real cost of manufacturing toys. Materials used cost $2,000 per year. Production involves 5 trainees paid $500 expenses each per year. The single machine
used is used for toy production 20% of the time and full depreciation is valued at $1,000 per year. Electricity costs $600 a year and toy production takes up half of a workshop costing $2,000 in rent, rates and repairs
per year. The paid administration worker calculates that he spends 30% of his time on book-keeping, sales and marketing toys. He is paid $8,000 per year. The total income of the project is $25,000 per year
and sales of toys contribute $5,000 to this. 

Its total costs are $24,500 per year.

Cost Centre Analysis
Materials            =    $2000
Labour (5 x $500) =   2500
Depreciation ($1,000 x 20%)   =  200
Electricity ($600 x 20%)   =  120
Rent ($2,000 / 2) =           1000
Administration ($8,000 x 30%) = 2400
Total                 =   8220
From these figures we can calculate the following:
Toy making is responsible for 34% of all costs ($8,220 / $24,500 x 100)
Toy making generates only 20% of all income ($5,000 / $25,000 x 100) 

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