40 Cost accounting Direct and indirect costs Coxt accounting involves calculating the costs of different proulucts 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 he directly related to the production of particular units of a product — are gnite easy 16 caieulaie, Examples inchnde manufacturing materials and manufacturing wages. But there ure also indirect costs or overheads — costs and expenses chac cannot be identified with particular manufacturing processes oF nits of production. Examples include rent or property taxes for the company’s offices and factories, leetricity for lighting and heating, the maintenance deparrment, the factory canteen or restaurant, managers’ salacics, 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. BrE: overheads; AmE: overhead Fixed and variable costs Companies also differentiate hetween 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 rene and interest payments. Variable costs are chose that change in proportion to the volume of production, such as components and raw marerials, 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 differenc products. Absorption costing attemprs to charge all direct costs and all production costs, and sometimes all indirect costs such as administrative expenses, t0 each of the company’s products or services, Activity connected with a particular activity (e.g. product design, manufacturing, distribution, customer service}, even if they ace carned out by ditterent deparuments 19 the company Most companies have departments or functions that do not generate any profit but only incur costs (c.g, accounting and legal departments). For accounting purposes, companies often make these departments into cost centres, and allocate or charge all the costs related co them separately. ed costing, calculaes all the costs BrE: cost centre. AmE: cost center Breakeven analysis When deciding whether ir would he profirahle to produce a praducr, or offer a service, is. 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 numbee of units sold — at which the company covers its costs ~ pays all its expenses. To make a profit, iris ne companies do a breakeven analy sary to sell more than this Although cost account decisions also depend on: allows companies to calculace production costs, pricing wm che level of demand the prices of competitors’ products the company’s financial situation che company’s objectives ~ the goals or aims it wants to accomplish che company’s marketing policies ~ whether ic is interested in maximizing sales or maximizing profit Projessional English in Use FinenceWwW. 17.2 17.3 ‘Match the words in the box with the definitions below. Look ar A, B and C opposite ro. help you. | breakeven point Bxed costs | profitable cost centre overheads variable costs 1 expenses that are not clearly related co production or manufacturing 2a unit of accivity in an organization for which coses are caleulaced separarely 3 costs thar depend on the amount prodnced 4 adjective meaning providing income for a company 5 costs that do not change according to the production volume 6 the sales vohame at which a company doesn’t make a loss, but doesn’t make a profit Sort the following into direct, indirect, fixed and variable costs, Look at A and B opposite to help vou. ees Direct Indirect | Bad debss v ¥ Components WA 4 \y | Flectricity to: run machines | | Electricity for heating, Equipment repairs | Factory canteen { | Raw materials ( Property rax Rent Which of the following seatements describes: 1 absorption costing? 2 activity: based costing? As well as direct manufacturing costs ~ materials and labour — we allocate part of our fixed and variable manufacturing overheads to the cast of every product. | We identify all the diffecene functions within che company, and assign costs 60. products and services according to how much these functions are involved in the process of providing the products and ae Se A ee Over to DR Se Ce an two other products you bought recently? Professional English in Use Finance 4HY Direct taxes Govertiments finance most of their expenditure by taxation. IF they spend moce than they levy or charge in taxes, they have ro borrow money. Direct taxes are collected by the government from the income of individuals and businesses. m Individuals pay income tax on their wages or salaries, and most other money ¢hey receive. me Most countries have a capital gains tax on peofies made from the sale of assets such as stocks or shares, This is usually imposed or levied at a much lower rave than income tax mA capital transfer tax (commonly called death duty in Britain) is usually imposed on inhericed moncy or property, Other names for this tax arc inheritance tax or estate tax. am Companies pay corporation fax on their profits. Business profirs are generally taxed. bwice, because after the company pays tax on its profits, the sharcholdets pay income tax on any dividends received from these profits wm Companies and their employees also have to pay taxes (called national insurance in Britain) which che government uses to finance social security spending ~ unemployrent pay, sick pay, ec. BrE: corporation tax; AmE: income tax ED. indirect taxes 104 Indirect taxes are levied on the production pr sale of goods and services. They are included in she price paid by the final purchaser fm In mose European counties, companies pay VAT or value-added tax, which is levied at each stage of production, hased on the value added to the product at that stage. The whole amount is added to the final price paid by the consumer. In Canada, Australia, New Zealand and Singapore, this tax is called goods and services tax or GST. In the USA, there are sales taxes, collected by retailers, levied on the retail price of goods. @ Governments also levy exeise taxes or excise duties — addirional sales taxes on. commodities hike tobacco proxhcts, aleoholie drinks and petrol. mm Special raxes, called tariffs, are often charged on goods imported from abroad, (See Unit 43) Income tax for individuals % usually progressive: people with higher incomes pay a higher rate of tax (and therefore a higher percentage of cheir income) than people with lower incomes. Indirect taxes such as sales tax and VAT are called proportional taxes, imposed at a fixed rate, Bur indizece taxes are actually regressive: people with a low income pay a proportionally greater pare of their income than people with a high income, ean pe] Non-payment of tax To reduce the amount of income tax that employees have t0 pay, some employers give their staff advantages instead of taxable moncy, called perks, such as company cars and free health insurance Mulsinational companies often register their head offices in tax havens ~ small countries where income taxes for foreign companies ave low, such as Liechtenstein, Monaco, the Cayman Islands, and the Bahamas. Using legal methods to minimize your tax burden ~ the amount of tax you have to pay — is called tax avoidance. This often involves using loopholes ~ ways of getting zraund the lnw, because of an error or a technicality in che law itself. Using illegal methods — such as not declaring your income, or reporting it inaccurately ~ is called tax evasion, and can lead to big penalties Professional English in Use Finance49.1 49.2 43.3 49.4 What are the standard names for the tax or taxes paid on the following? Look at A and B opposite to help you. 1 alcoholic drinks and twbaceo products 2 company profits 4 goods bought ir cores money received from cela salaries and wages goods made in other countries money made by selling stocks at a profit tives alter their death vous Find words in A and B opposite with che following meanings. 1 an adjective describing taxes on revenue or income body 3 money paid by the goverment co sick ancl unemployed people 4 a tay that has a higher rate for taxpayers with a higher income 5 an adjective describing taxes on consumption or spending 2 a tax that has one rate that is the same for ev Are the following statements crue of false? Kind reasons for your answers in A, Band opposite, 1 Capital gains are generally taxed at a higher rate than income. 2 The same sum of money can be taxed more than once. 3 Sales taxes can be both proportional and progressive at the same time, 4 Excise dies are extra sales taxes on selected products 5 Many international companies have their registered headquarters in small countries where they do only a small propostion of their business 6 Employees will generally pay less tax if their employer reduces their salary a little and provides them wih a caz 7 Tax avoidance is illegal. @ Perks and loopholes are forms of tax evasion. Find five verbs in A and B opposite that can be used t@ make word combinations with ‘aw’ Over to 4ou nae De ee eR ee ca PRU ee meee ore Professional Englsit in Use Finance 105