1.1 The Costing Methods Map (Start Here)
Cost accounting is the system a business uses to collect, share and analyse its costs, so that each product, each sales channel and each customer is charged with what it really costs. Put simply, it is costing that keeps up with a business as it grows: one product can be costed on one card, but shared overheads, stages, losses, channels and customers each need a method of their own. This lesson maps those methods.
Two years on
Two years have passed. Mirisai Mukando, the savings club, still meets on the last Saturday of the month in Highfield, Harare, this month at the home of Mai Rumbi (Rumbidzai Gavaza), the club treasurer. Several members now run much bigger businesses and bring bigger questions.
Chiedza Mupambwa, who now runs a maheu factory in Southerton, speaks first. Two years ago she sold 14,000 bottles a month from a rented kitchen. Now she sells 60,000 from a factory with 14 staff, two production areas and four kinds of customer. “I sell four times as much,” she says, “but my profit feels smaller than the work.” She believes she makes USD 1,500 a month.
Worked example W1: Chiedza then and now
| A | B | C | |
|---|---|---|---|
| 1 | Line | Two years ago (course 58 plan) | Now (the factory) |
| 2 | Bottles sold a month | 14,000 | 60,000 |
| 3 | Average price per bottle | 0.45 | 0.45 |
| 4 | Variable cost per bottle | 0.27 | 0.25 |
| 5 | Contribution per bottle | 0.18 | 0.20 |
| 6 | Fixed costs a month (including her pay) | 2,250 | 10,500 |
| 7 | Break-even bottles a month | 12,500 | 52,500 |
| 8 | Margin of safety (bottles) | 1,500 | 7,500 |
| 9 | Margin of safety (share of sales) | 10.7% | 12.5% |
| 10 | Profit a month | 270 | 1,500 |
How it is worked:
B5: =B3-B4, then copy it across to C5B7: =ROUNDUP(B6/B5,0), then copy it across to C7B8: =B2-B7, then copy it across to C8B9: =B8/B2, then copy it across to C9B10: =B2*B5-B6, then copy it across to C10
What it shows: Chiedza’s contribution per bottle has risen to USD 0.20 (C5) because she now buys in bulk, but her fixed costs have grown almost five times, to USD 10,500 (C6). She must sell 52,500 bottles a month to break even (C7). Her margin of safety is 7,500 bottles, or 12.5% (C8, C9), and the grid says she makes USD 1,500 (C10). That is true only for one product at one price; Module 4 shows the four prices and the costs this grid cannot see.
Try it: Copy this into Excel starting at cell A1, then type the formulas in the list. Change C3 to 0.446, the average price she actually receives across her customers, and watch C10 fall.
Why growth breaks simple costing
- Shared overheads: rent, a supervisor and machines serve several products and areas
- Stages and losses: product passes through several stages, and some is lost at each
- Channels and customers: each pays a different price and causes different selling costs
- Limits: a shortage of flour, oven time or cash changes which product earns most
- Stock: when production and sales differ, profit depends on how stock is valued
The costing methods map
No single method answers every question. The map shows each method, the question it answers and where it is worked. Four related methods are explained briefly in 5.4; contract and backflush costing are left out.
| Method | The question it answers | Where |
|---|---|---|
| Overhead absorption | What share of overheads should each product carry? | 1.2, 1.4 |
| Marginal and absorption costing | Why does profit move with stock? | 1.3 |
| Process costing, normal and abnormal loss | What does a unit cost when output runs through stages? | 2.1, 2.2, 2.4 |
| Joint and by-product costing | How is a shared cost split; should we process further? | 2.3 |
| Relevant costing | Which costs change because of this decision? | 3.1, 3.3, 3.4 |
| Limiting factor and throughput | What do we make first when a resource is short? | 3.2 |
| Channel and customer costing | Which channels and customers make money? | 4.1, 4.2, 4.4 |
| Standard costing and variances | Why did a cost differ from standard? | 4.3, 4.4 |
| Target costing and value engineering | What may a new product cost at the market price? | 5.1 |
| Kaizen costing and the cost of quality | How do we keep cutting cost once production runs? | 5.2 |
| Life-cycle and replacement costing | What does an asset cost over its life, at today’s prices? | 5.3 |
Three growth questions
- What does each product really cost when overheads are shared? (Modules 1 and 2)
- Which products, channels and customers make money? (Modules 3 and 4)
- How do I keep costs down as I grow? (Module 5)
Meet the club again
| Member | Business now | Lessons |
|---|---|---|
| Chiedza Mupambwa | Maheu factory in Southerton: 60,000 bottles a month, 14 staff, four sales channels | Module 1 to Module 5 |
| Tsitsi Mapuranga | Curtain workroom in Warren Park with two machinists; hotel and clinic contracts | 1.2 |
| Baba Kuda (Kudakwashe Ndlovu) | Broilers in Domboshava: 1,000-bird cycles in two sheds; now dresses birds | 2.2, 2.3 |
| Sekai Chiwara | Bakery in Chitungwiza with a night shift; supplies shops, a hotel and a school | 3.1 to 3.4 |
| Tapiwa Chakanyuka | Phone shop with one assistant; walk-in, online and company customers | 4.2 |
| Tawanda Marowa | Décor and events hire in Glen View | 5.3 |
| Mai Rumbi (Rumbidzai Gavaza) | Vegetable vendor in Mbare and club treasurer | 1.1 |
How to use this course
- Each worked example is a spreadsheet grid. Type the cells inside it into Excel starting at cell A1, then the formulas listed under it; “copy it down” or “copy it across” means use Excel’s fill handle.
- The course builds on Know Your Costs: Practical Costing and Pricing for Small Business (course 58); W1 is your recap. For the manager’s view of the same numbers, see Finance for Non-Finance Managers: Read the Numbers, Make Better Decisions (course 47).
- Every figure in the case is fictional; use your own.
This course teaches standard costing methods in its own words and credits each method’s originators where it is taught. It is not endorsed by, or affiliated with, any author, standard-setter or organisation named in it.
This course teaches costing; it does not promise that any business will succeed or earn a particular income. Results depend on your market, your prices and your decisions.
About the case: Mirisai Mukando, its members and their businesses are fictional. They were created by EunoiaData for teaching purposes only. Any resemblance to real clubs, businesses or people is coincidental. All figures are fictional and illustrative; prices in your market will differ.
Three views
| View | What it means here |
|---|---|
| The owner | Profit by product, channel and customer, not one figure for the whole business |
| The accountant | A costing system that matches how costs are really caused, and stock valued correctly |
| The lender | Margins that hold up as volume grows, and debtors the business can carry |
Words to know
| Term | What it means |
|---|---|
| Cost accounting | The system for collecting, sharing and analysing costs |
| Overhead | A cost shared by several products, areas or customers |
| Cost centre | A part of the business whose costs are collected together, such as cooking or bottling |
| Absorption | Charging a share of overheads into the cost of each unit or job |
| Relevant cost | A future cost that changes because of a decision |
Example: A concrete block maker in Kitwe (fictional) opened two more yards and tripled his sales. His best seller, a hollow block sold cheaply to housing estates with free delivery and long credit, turned out to be his least profitable. He began charging for delivery beyond a set distance.
Check before you act: Figures follow a fictional case and are illustrative, not benchmarks. Costs, prices and rates differ by place and change often; use your own figures and test each method on your own records.
Key takeaway
Growth adds shared overheads, stages, channels and customers. Use the methods map to pick the method that answers your question, and test each profit figure before you believe it.
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