10.4 Cost Reports for Manufacturing, Service and Not-for-Profit Organisations

Why this topic is examined

Syllabus area C4(d) asks you to prepare reports in a range of organisations: "cost accounting statements for management information in manufacturing, service and not-for-profit organisations". Expect calculations of cost per unit (especially composite units) and questions about which measure suits a given organisation. Section 9.1 explained why services are harder to measure; this section shows the calculations.

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Manufacturing cost statements

A manufacturing cost statement reports the cost of output by element and compares it with budget or standard. A typical monthly statement for 8,000 units:

The unit columns make the problem clear: materials cost $0.50 per unit more than budget, partly offset by labour $0.25 per unit cheaper. The standard costing variances in Chapters 7 and 8 would explain why.

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Service costing and composite cost units

Service organisations often measure output with a composite cost unit that combines two dimensions of activity:

$$\text{Cost per composite unit} = \frac{\text{Total cost for the period}}{\text{Total composite units for the period}}$$

Worked example 1: a haulage company

A haulage company records these journeys for one lorry in a month:

Monthly costs for the lorry:

$$\text{Cost per tonne-km} = \frac{\text{\textdollar}8{,}000}{6{,}000} = \text{\textdollar}1.33 \qquad \text{Cost per km} = \frac{\text{\textdollar}8{,}000}{690} = \text{\textdollar}11.59$$

Cost per tonne-kilometre is the better measure for pricing, because it reflects both the weight carried and the distance travelled. A journey of 5 tonnes over 300 km (1,500 tonne-km) would be expected to cost about $2,000.

Worked example 2: a hospital ward

A 30-bed ward has these costs for a 30-day month:

Available bed-days = 30 beds × 30 days = 900. Average occupancy was 80%, so patient-days = 900 × 80% = 720.

$$\text{Cost per patient-day} = \frac{\text{\textdollar}315{,}000}{720} = \text{\textdollar}437.50$$

Many ward costs (nursing, overheads) are largely fixed in the short term. If occupancy rose to 90% (810 patient-days) with little extra cost, the cost per patient-day would fall towards $389. Occupancy is therefore a key non-financial measure alongside cost per patient-day.

Useful service measures

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Not-for-profit organisations: value for money

Charities, public services and other not-for-profit (NFP) bodies do not aim to maximise profit, so their reports focus on value for money, often described by the three Es:

Reports for NFP organisations therefore combine:

• cost per unit of service (cost per meal, per patient, per student);
• budget comparisons, since spending is often limited by grants or public funding; and
• non-financial outcome measures, because the organisation's purpose is not expressed in profit.

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Presenting management reports

Whatever the organisation, a good cost report:

• is addressed to the manager who can act on it and shows the items that manager controls;
• compares actual results with a relevant benchmark (budget, standard, prior period);
• expresses costs per unit of output so that performance at different activity levels can be compared;
• highlights significant differences (management by exception); and
• includes non-financial measures where they explain performance better than money.