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Costing Part 2

Your list will probably be similar to this.

  • Staff Salaries
  • Electricity
  • Heating
  • Telephone
  • Printing
  • IT
  • Postage
  • Staff Training
  • Attendance at conferences and seminars
  • Stationery
  • Premises (rent or charge)
  • Cleaning
  • Subscriptions
  • Books, leaflets etc purchased
  • Staff travel

You may find a list of income and expenditure headings referred to as the Nominal Ledger.


To say that a cost is ‘fixed’ does not mean that it never changes. However it is fixed in relation to the volume of activity. Variable costs, on the other hand, are variable according to the volume of activity.


Go back to your list of activities and decide whether each one is a fixed or variable cost. Remember that fixed means fixed over the short-term and not variable according to volume of activity.

Did you identify any of your costs as variable? In practice most services are heavily weighted towards fixed costs. You may have thought that staff salaries were variable. It is true that if there were to be a sustained increase or decrease in activity then staff numbers would be reviewed and changes made. However in the short term, staff numbers will not be affected by how many students visit your service from one week to another. If you are responsible for visiting students on placement then there may be an element of variable costs as the more students on placement, the more visits and therefore potentially higher travel expenses.

However, if we go back to student Jo’s card-making activity we can see that in manufacturing-type business, there is a higher element of variable costs. The more cards Jo makes and sells, the more card, decorations, glue etc the business will require.  Jo needs to know how much it costs to make a card so that the selling price of each card can be calculated to provide a profit. In this case, the cost of each card will be made up of the cost of the materials, the cost of Jo’s time (represented by the money put into the piggy bank), both of which are variable and increase the more cards are made and sold, and the fixed cost which so far is just the cost of photocopying leaflets but which may include things like specialist cutting equipment, display stands etc.


You can read more about Costing in your chosen text book.


The most appropriate basis on which to calculate costs varies according to the type of business. Since you are providing a service, this module concentrates on models appropriate for service costing, and not those commonly used in product costing where a business is producing something tangible (widgets, computers, packets of biscuits etc).

Costing is often concerned with working out the cost of an individual unit of production i.e. one widget, computer or packet of biscuits. In the context in which you work, this could translate to working out the cost of one student interaction or the cost per student enrolled at the University. You may also be asked to identify the costs associated with a particular part of the service.

For example you may be working on a particular project for part of your time and you may need to work out how much that project has cost. In working on that project you will have used not only your time but also other resources such as paper and printing, telephone, travel, etc. Someone will have to decide the basis of costing that project.

Absorption (Full Cost)

As its name implies, this is a method of deriving costs which takes account of all the costs of making a product or running a service when deciding on the cost of an individual item.

The University of the South of Britain (USB) has 5,000 FTE students and has worked out the annual cost of running its Student Employment Service (SES) as follows:

Staff Salaries and other costs


Heat, light and power










Staff Training


Attendance at conferences and seminars




Premises (rent or charge)






Books, leaflets etc purchased


Staff travel




The cost of running the SES is  therefore £51.40 per FTE enrolled student.

However, some students never use SES services, and some use it more than once. Some students only attend a drop-in session, group session or browse the information on offer, while others attend longer one-to-one sessions. Suppose USB wanted to know the costs of offering these different types of service?


It would be possible to work out an average cost for the staff time involved in each of these different types of interaction based on how many there are and how long each one takes. This might also take into account that different staff carry out different functions – for example it may be that only qualified staff, who might have a higher salary level, carry out one to one interviews.

This would provide some indication of the DIRECT costs of these activities.

It might also be possible to include the costs of materials in these direct costs, for example by saying that on average a student who browses takes away three leaflets at a cost of 5p each. However that is an unnecessary complication for this example.

It is then necessary to work out a fair share of the total of indirect costs (overheads) for each of these different activities. The difficulty, of course, is deciding what is ‘fair’. You could simply decide to divide them equally between the four different activities (browsing, group sessions, drop-in, one-to-one sessions) so that each area is attributed 25% of these costs. You could estimate the numbers of students making use of each different activity and allocate the indirect costs on a proportional basis.

There is no right or wrong way to allocate indirect costs. The best method to use is the one that most people are willing to accept. You also have to be consistent.

Activity Based Costing (ABC)

You could look at each type of indirect cost separately and decide how much should be attributed to each activity – for example as a one-to-one interview lasts longer than a drop-in interview, a higher proportion of the costs of heat and light will be allocated to this activity. This form of costing is known as Activity Based Costing (ABC) and is often used in the service context. It sometimes happens that as a result of carrying out this type of analysis, it emerges that something is being bought, or charged for, which is not used by any of the activities taking place!


In manufacturing, this represents the cost of making one more item. This is often the same as the variable cost, since the fixed costs (machinery, rent of factory etc) is not affected by making one more item. However there will come a point where making one more car, for example, will necessitate opening a whole new production line or operating another shift. In this case it is not worth making ‘one more’ item. The business will have to decide how many additional items will need to be produced in order to make it a viable activity.

Your service will have similar marginal costs to consider. For example if you buy information leaflets then you may have to order them in batches of so-many hundred or thousand. If you run out towards the end of the year then do you order a new batch when you know that some are unlikely to be used? If you do then the cost of each leaflet will be higher than if they are all used. If the information is going to be out of date by the next academic year then the cost of buying more than you need will have to be compared to the non-financial cost of not having information to give to students.


There will be much more about different methods of costing in your chosen text book. Many of them will be relevant largely to manufacturing settings.


This is a decision-making tool. At its simplest it involves adding up the financial costs and benefits associated with a proposed expenditure and deciding whether the costs outweigh the benefits.

An example might be the decision to replace the office photocopier with an all-in-one scanner/copier/printer unit. As well as the initial outlay on the machine there will be ongoing maintenance and consumable costs. On the other hand, there may be savings in not having to buy separate copier toner and printer toner and the maintenance costs may be reduced if the existing machine is proving unreliable due to age.

Often the benefits (and sometimes the costs) are not so easily quantifiable. For example if the proposal is to buy a new IT system there will be short-term costs associated with the staff time taken up in learning the new system. These may be outweighed in the medium to long term by savings in staff time using a new more efficient system. If these costs are to be taken into account then an estimate will have to be made.

Sometimes the benefits are even more intangible. There will be costs associated with, for example, redecorating and providing new furniture. The benefits of a more pleasant working environment cannot easily be quantified.