Cost Accounting (Chapter 10) [P2] Flashcards
Types of manufacturing costs
- material costs
- labour costs
- factory overheads
Definition of material costs
Costs of all raw materials used in the manufacture of product
What are direct material costs?
Costs of all raw materials used directly in the manufacture of products (eg. zips, buttons, fabric to make a dress)
What are indirect material costs?
Cost of raw materials used in the manufacturing process that are either not directly identifiable in the finished product or an insignificant part of the finished product. They form part of factory overheads (eg. oil for sewing machine or thread to stitch dress)
Definition of labour costs
Costs of all labour involved in the manufacture of a product
What are direct labour costs?
Aka “touch labour”, salaries and wages paid to employees directly involved in the manufacture of products. Their work is directly identifiable in the production process
What are indirect labour costs?
Salaries and wages paid to employees not directly involved in the manufacture of a product. Forms part of factory overheads (eg. factory supervisor or dress designer)
Definition of factory overheads
Costs of manufacturing process not directly identifiable with a specific product, all costs of production excluding direct costs (eg. indirect material and labour, water and electricity, factory rental, depreciation of machinery)
Definition of sales and distribution cost
Costs incurred in marketing, distributing, selling manufactured products
Definition of administrative cost
Costs incurred in administering manufacturing business
Definition of period costs
Costs related to running business, not to manufacturing process. It decreases net profit, but isn’t taken into account when cost price of product is calculated (eg. sales and distribution cost, finance cost, administrative cost)
What is the prime cost?
Total direct costs involved in manufacturing process
What is the total manufacturing cost?
Aka cost of production, is the sum of all costs involved in the manufacturing process
What is the unit cost?
The cost price of one individual unit of a product
Prime cost calculation
Prime cost = direct material cost + direct labour cost + other direct costs
Total manufacturing cost calculation
Total manufacturing cost = prime cost + factory overheads
Unit cost calculation
Unit cost of product = total manufacturing cost / number of units produced
Definition of cost behaviour
Behaviour of a specific manufacturing cost in relation to changes in production levels (number of units produced)
Manufacturing cost groups according to cost behaviour
- fixed costs
- variable costs
- semi-variable costs
- semi-fixed costs (step costs)
What are fixed costs
Costs that don’t vary according to changing levels of production, and remain constant at all levels of production, even if no units are produced (eg. factory rent)
What are variable costs
Costs that vary according to the number of units produced and are directly proportional to the level of production. (eg. direct material and labour costs)
What are semi-variable costs
Costs that start at a fixed minimum cost that is incurred regardless of production levels, but increases as production increases (eg. electricity cost)
What are semi-fixed costs
Costs that are fixed up to a certain level of production, if production exceeds this level, then these costs increase in steps (eg. a machine can produce 1000 units a day, if production exceeds this, a new machine must be bought)
Total manufacturing cost calculation
Total manufacturing cost = fixed costs + variable costs
