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Summary AAT level 2 Elements of costing
This document summarises everything needed to know for AAT level 2 exam: elements of costing.
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Elements of costingTypes of business
Sole trader - a small business with only one owner, owner has unlimited liability.
Partnership – a small business with few owners, ususaly2-5, owners have unlimited liability.
LTD – private limited company – only few shares can be sold, owners have limited liability.
PLC – public limited company – stocks are freely sold on the market; the business is its own
entity meaning the owners possessions are not at risk.
Financial accounting
Financial statements
Main financial statements - balance sheets, income statements, cash flow statements,
statements of shareholders' equity.
Management accounting – is planning forward and is primarily used by managers or
directors.
Financial accounting – is records of past (numbers) and is used by people outside of the
business.
Cost classification
Cost object – anything for which cost data is desired, e.g., a specific job, department, or
customer.
Cost unit – a unit of product or service for which a cost can be ascertained, e.g., a loaf of
bread in a bakery.
Financial accounting – classifications are capital and revenue.
Management accounting – cost classifications are nature, function, and element.
Function – also called functional area examples are admin, marketing, production.
Element – material, labour, overhead/expenses
Nature – direct and indirect.
Direct – costs that specifically relate to a single unit, e.g., flour used in a cake.
Indirect - Cost that cannot be specifically related to a single unit, e.g., rent of a factory.
Responsibility centres
Cost centre – a section of the business that generates cost and does not directly generate
profit, e.g., manufacturing or admin.
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