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Look at the last two annual reports and balance sheets of your company or one you would like to work for. What differences do you notice in the balance sheets and what reasons can you find for these?



A. Direct and indirect costs

Cost accounting involves calculating the costs of different products or services, so that company managers can know what price to charge for particular products and services and which are the most profitable. Direct costs - those that can be directly related to the production of particular units of a product - are quite easy to calculate. Examples include manufacturing materials and manufacturing wages. But there are also indirect costs or overheads - costs and expenses that cannot be identified with particular manufacturing processes or units of production. Examples include rent or property taxes for the company’s offices and factories, electricity for lighting and heating, the maintenance department, the factory canteen or restaurant, managers’ salaries, and so on.

Costs such as these are often grouped together on the profit and loss account or income statement as Selling, General and Administrative Expenses.


B. Fixed and variable costs

Companies also differentiate between fixed costs and variable costs. Fixed costs are those that do not change in the short term, even if the production level changes, such as rent and interest payments. Variable costs are those that change in proportion to the volume of production, such as components and raw materials, and overtime payments.

Manufacturing companies have to find a way of allocating fixed and variable costs to the various products they make: that is, they divide up the costs and charge them to the different products. Absorption costing attempts to charge all direct costs and all production costs, and sometimes all indirect costs such as administrative expenses, to each of the company’s products or services. Activity-based costing calculates all the costs connected with a particular activity (e.g. product design, manufacturing, distribution, customer service), even if they are carried out by different departments in the company. Most companies have departments or functions that do not generate any profit but only incur costs (e.g. accounting and legal departments). For accounting purposes, companies often make these departments into cost centres, and allocate or charge all the costs related to them separately.


C. Breakeven analysis

When deciding whether it would be profitable to produce a product, or offer a service, companies do a breakeven analysis. This compares expected sales of the new product with expected costs - both direct and indirect - at various production levels. The breakeven point is the sales volume - the number of units sold - at which the company covers its costs - pays all its expenses. To make a profit, it is necessary to sell more than this.

Although cost accounting allows companies to calculate production costs, pricing decisions also depend on:

§ the level of demand

§ the prices of competitors’ products

§ the company’s financial situation

§ the company’s objectives - the goals or aims it wants to accomplish

§ the company’s marketing policies - whether it is interested in maximizing sales or maximizing profit.


Ex.7.1. Match the words in the box with the definitions below. Look at texts A,B and C to help you


breakeven point cost centre fixed costs overheads variable costs profitable


1. expenses that are not clearly related to production or manufacturing

2. a unit of activity in an organization for which costs are calculated separately

3. costs that depend on the amount produced

4. adjective meaning providing income for a company

5. costs that do not change according to the production volume

6. the sales volume at which a company doesn’t make a loss, but doesn’t make a profit


Ex.7.2.Sort the following into direct, indirect, fixed and variable costs. Look at texts A and В to help you.


Cost Direct Indirect Fixed Variable
Advertising expenses        
Bad debts   +   +
Components +     +
Electricity to run machines        
Electricity for heating        
Equipment repairs        
Factory canteen        
Overtime pay        
Raw materials        
Property tax        


Ex.7.3.Which of the following statements describes:

1. absorption costing?

2. activity-based costing?


a) As well as direct manufacturing costs - materials and labour - we allocate part of our fixed and variable manufacturing overheads to the cost of every product.


b) We identify all the different functions within the company, and assign costs to products and services according to how much these functions are involved in the process of providing the products and services.


Over to you

What do you think were the most important factors in the pricing of:

■ this book? ■ two other products you bought recently?






accountant бухгалтер/ есепші
account счет / шот
board of directors совет директоров/ директорлар кеңесі
capital капитал / капитал
clerk служащий / қызметкер
current account текущий счет / ағымдағы шот
deposit account депозитный счет / депозиттік шот
depositor вкладчик / салымшы
dividend дивиденд/ дивиденд
draw upon an account (v) снимать со счета / шотынан шешу
invest (v) инвестировать / инвестициялау
interest процент, процентный доход / пайыз, пайыздық табыс
joint stock акционерный капитал /акционерлік капитал
loan ссуда, заем, кредит / ссуда, қарыз, несие
profit прибыль / пайда
reserve резерв, запас / резерв,қор
run the hank (v) управлять банком / банкті басқару
shares акции/ акциялар
shareholder акционер / акционер
saltine выписка из банковского счета / банк шотынан көшірме
standing order постоянное поручение клиента банку / клиенттің банкке тұрақты тапсырмасы

Ex.1 Read the text.

The English commercial banks have branches in all the major towns and a similar structure and mode of working is common to them all. The owners are the shareholders. At the outset they provide the necessary capital. They are all organized on the joint stock principle and are registered pub­lic companies. The Chairman and Board of Directors are elected by the ordinary shareholders at the Annual General Meeting and are responsible for the efficient management of the bank. The Board is concerned with the overall policy of the bank and the major decisions which put that policy into effect. The Board will appoint a Managing Director who is directly responsible to them and a member of the Board. They will also appoint the most senior executives who in turn appoint the rest of the clerical staff who will be responsible in differ­ent capacities for the day to day running of the bank. The essence of a bank's activities is the collection of depos­its through current accounts and deposit accounts and the use of these funds to provide loans or funds for investment. The current account is the one commonly held and is drawn upon by cheques and standing orders. The deposit account is more in the nature of a savings account. The pattern of in­vestments which a bank decides upon is crucial because, on the one hand, the bank must use the funds wisely to make a profit and, on the other, funds must be available for deposi­tors to withdraw when they wish to do so. At the end of each business year the Directors recommend and the Annual General Meeting decides how much of the profit should be distributed to the shareholders as dividend, and how much should be retained in the business. In prepara­tion for the Annual General Meeting, a bank publishes its Report and Accounts. These must be sent to every share holder and are also available for anyone with an interest in the affairs of the bank. From the published accounts share­holders can easily determine the total profits the bank has earned and how much is available for distribution,

Ex.2 Answer the questions:

1. Who owns the English commercial bank?

2. How does a bank start?

3. Who chooses the Board?

4. What is the Board's task?

5. Who hires the employees?

6. What are the bank's main activities?

7. How are the profits distributed?

8. How are the shareholders kept informed?

Ex. 3 Using suffixes -er, -or, -ier, -ent, -ial,etc., give nouns which are related to the following:
bank invest direct office execute work cash manage deposit own hold

Ex.4 Explain the following:

1. to raise capital

2. to become a public company

3. to put money into business

4. an account in a bank from which money can be drawn by cheque ! -

5. profits not paid out as dividends

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