Accounting for Material and Labour Costs Flashcards
CHAPTER 6
3 main ways of classifying materials
According to :
- Substances that make them up
- How they are measured
- Physical properties
Raw material
Goods purchased for incorporation into products for sale
Work in progress
An intermediate stage between the manufacturer purchasing the materials that go to make up the finished product and the finished product
Finished good
A product ready for sale or despatch
Unit produced
= Unit sold + closing - opening
Double entry for issue of direct material
Dr WIP
Cr Material control a/c
Double entry for issue of indirect material
Dr Production Overhead
Cr Material control a/c
Double entry for material returned from production to store
Dr Material control a/c
Cr WIP/Production overhead
Explain FIFO
Values issues at the prices of the most oldest purchases
Explain LIFO
Values issues at the prices of the most recent purchases
Explain cumulative weighted average pricing
Calculate an average cost of all units whenever a new delivery is received
Explain periodic weighted average pricing
Calculate an average cost per unit at the end of a given period
–> easier to calculate than CWA
FIFO : In period of inflation…
- materials to be issued at the cost lower than current market value
- closing inventories valued at a cost current to market value
LIFO : In period of inflation…
- materials to be issued at price current to market value
- closing inventories lower than current market value
CWA : In period of inflation….
- Value of material issues will rise gradually, but will tend to lag a little behind current market value @ date of issue
-
Closing inventory also lower than current market value
———————————————-
Cost of materials issued + value of closing inventory = Cost of purchases + value of opening inventory
Advantages of FIFO
–> Logical pricing method
–> Easy to understand & explain to managers
Disadvantages of FIFO
–> Cumbersome to operate
–> Difficult to compare costs & make decisions (varying prices for same material)
–> Prices may diverge widely from market price when there is high rate of inflation
Advantages of LIFO
–> Issued price close to current market value
–> Managers continually aware of current costs when making decisions
Disadvantages of LIFO
–> Cumbersome to operate (several batch baru separuh je guna astu dah ada batch baru masuk)
–> Often opposite to what is actually happening
–> Hard to make decision (variation in prices)
Advantages of PWA & CWA
–> Fluctuations in prices are smoothed out
–> Ease decision making
–> No need to identify each bath separately
Disadvantages of PWA & CWA
–> Resulting issue prices rarely an actual prices that has been paid
–> Price can be lower than current market value
Shift allowances
Extra payments to employees who agree to work shifts at unsociable hours/irregular business hours
Output related pay
Receive wages that are directly related to the output produced
Piecework system
Employees are paid according to number of good units of production
What is the condition to operate individual bonus scheme
Employee has full control over his own productivity/ speed of his work
–> the speed of work is not dependent upon production of other employees / speed of machinery
Total labour cost for an employer =
Gross pay + Employer’s benefit contribution
Direct labour cost
Cost of hours worked by production workers who are involved directly in the business’s productive activities
Indirect labour cost
- Indirect workers employment cost
- OT premium direct workers
- Idle time direct workers
Double entry for direct labour cost
Dr WIP
Cr Wages control a/c
Double entry for indirect labour cost
Dr Production overhead
Cr Wages control a/c
Double entry for gross pay
» Dr Wages control a/c - Gross pay
» Cr Bank - Net pay
» Cr Payable account (tax) - Income tax & benefit contribution
Double entry for purchase of material on credit
Integrated system
Dr Purchase
Cr Payable A/C
Interlocking system
Dr Raw material inventory
Cr Cost Ledger Control A/C
