Cost Concepts

Question 1

Product Costs

Answer 1

Timing issue - depend when finished good is sold.
Include direct materials, direct labour and manufacturing overhead.
Go into the balance sheet as assets; only go through the P/L when they exit the business (when sold).
Inventory (balance sheet), sale, cost of good sold (P/L account/IS).

Question 2

P/L

Answer 2

Profit/Loss

Question 3

Period Costs

Answer 3

Not included in product costs.
Generally non manufacturing costs.
Not part of the cost of good sold.
They are written off to the P/L account in the period in which they are incurred (not necessarily when paid).
Expense (P/L account/IS).

Question 4

Balance Sheet - Retailer

Answer 4

Current Assets:
Cash
Debtors
Prepayments - eg insurance, only recognise cost in single year even though may last longer.
Stocks - bought in to sell, not sold then become an asset.

Question 5

Balance Sheet - Manufacturer

Answer 5

Current Assets:
Cash
Debtors
Prepayments
Stocks

Question 6

Manufacturer Current Assets - Stocks

Answer 6

Raw Materials - Materials waiting to be processed, no cost added to them at this point.
Work in Progress - Partially complete products, some material, labour or overhead has been added.
Finished Goods - Completed products awaiting sale.

Question 7

IS

Answer 7

Income Statement

Question 8

P/L account/IS - Retailer

Answer 8

Opening Stock + Purchases = Goods available
Goods available - Closing Stock = Costs of goods sold

Cost of goods sold match with sales gives gross profit

Question 9

P/L account/IS - Manufacturer

Answer 9

Opening FG stock + Cost of goods manufactured = Goods available
Goods available - Closing FG stock = Cost of goods sold

Cost of goods sold match with sales gives gross profit

Question 10

FG stock

Answer 10

Fixed Goods Stock

Question 11

Making decisions

Answer 11

Need to know profitability of products/services.

Question 12

Profit

Answer 12

Revenue - Cost

Question 13

Revenue - Cost

Answer 13

Profit

Question 14

Opportunity Costs

Answer 14

The potential benefit that is given up when one alternative is selected over another.

Question 15

Costs of goods manufactured - overall structure

Answer 15

Material Purchases (COST) → Raw Material (BS STOCKS)

Direct Labour & Manufacturing Overhead (COSTS) → Work in Progress (BS STOCKS) → Finished Goods (BS STOCKS) → Cost of goods sold (P/L EXPENSES)

Selling and administrative (COSTS) → Selling and administrative (P/L EXPENSES)
→ Period Costs
ie goes straight onto the income statement

Question 16

Costs of goods manufactured - detailed structure

Answer 16

RAW MATERIALS -
Opening RM stock + RM purchased = RM available for use
RM available for use - Closing RM stock = RM used in production →

(Once RM enters the production process becomes direct material.)

MANUFACTURING COSTS -
→ Direct materials + direct labour + manufacturing overhead = Total manufacturing costs →

WIP
Opening WIP stock + (→ ) Total manufacturing cost = total WIP for period
Total WIP for period - Closing WIP stock = Cost of goods manufactured →

FINISHED GOODS
Opening FG stock + (→ ) Cost of goods manufactured - Costs of good available for sale = Cost of goods sold

Question 17

Differential costs and revenue

Answer 17

Costs and revenue that differ among alternatives

Question 18

Sunk Costs

Answer 18

Cost that has already been incurred and cannot be recovered.
Cannot be changed by any decision.
Not differential costs.
Should be ignored when making decisions.

Question 19

Cost Classification

Answer 19

A matter of grouping together costs which share the same attributes relative to a stated cost objective.

Question 20

Cost Objective

Answer 20

Any activity for which a separate measurement of costs is required.

Purpose of what cost is used for.

Should determine the classification to be used.

Changing the cost objective may alter the categorisation of a specific cots within a given classification.

Question 21

Cost Object

Answer 21

Anything for which cost data are desired.

eg Unit of product/service, organisational deparaments.

Question 22

Cost Objectives and Cost Classification

Answer 22

Assigning costs to cost objects - traceability (direct or indirect)

Financial reporting - inventoriable or expensed (product or period)

Predicting cost behaviour in response to changes in activity (fixed or variable)

Assessing performance (controllable or uncontrollable)

Making decisions (differential, sunk, opportunity)

Question 23

Retailer activity

Answer 23

Buy finished goods.
Sell finished goods.

Dont make anything, nothing in work in progess.

Question 24

Manufacturer activity

Answer 24

Buy raw materials.

Produce and sell finished goods.

Question 25

Manufacturers

Answer 25

Design and manufacture products for sale.

Must accumulate costs of manufacturing products.

Inventory consists of materials, work in progress and finished goods.

Question 26

Retailers

Answer 26

Purchase goods already manufactures and resell them.

Accumulate the purchased cost of goods.

Only have one type of inventory (merchandise), only for finished goods.

Question 27

Balance sheet

Answer 27

Statement or organisational financial position - their assets.

Goods valued at production costs - classified as an asset.

Question 28

Manufacturing and retail both report:

Answer 28

Cost of unsold goods on balance sheet.

Cost of goods sold on the P/L account and IS.

Question 29

Retailing

Answer 29

Purchases + Opening stock
→
Cost of sales + Closing Stock

Closing stock → balance sheet - stocks.

Cost of sales → P/L account/IS - cost of sales.

Question 30

Manufacturing

Answer 30

Cost of goods manufactured + Opening FG stock
→
Cost of goods sold + Closing FG stock

Closing FG Stock → Balance sheet - stocks (materials, WIP, FG)

Cost of goods sold → P/L account/IS - cost of sales.

Question 31

Manufacturing cost concept

Answer 31

Financial accounting -
Cost is a measure of resources used or given up to achieve a stated purpose.
→
Management Accounting -
Product costs are the costs a company assigns to units produced.
Costs accumulated internally and end up on statement.

Question 32

Manufacturing Costs

Answer 32

Associated with the production function in a factory.

Direct Materials.
Direct Labour.
Manufacturing overhead.

Question 33

Direct materials

Answer 33

Those materials that become an integral part of the product and that can be conveniently traced directly to it.

Question 34

Direct Labour/Touch Labour

Answer 34

Those labour costs that can be easily traced to individual units of product.

eg wages paid to assembly workers.

Question 35

Manufacturing overhead

Answer 35

Relating to indirect manufacturing costs that occur when product manufactured.
Can’t be directly traced to a product.
All organisations incur these.

Indirect labour and indirect materials.

Question 36

Indirect labour

Answer 36

Waged paid to employees who are not directly involved in the production work - all workers other than the workers who actually transform the raw materials into the finished product.

Work supports production process.
Adding value to raw material/labour making the item.

eg maintenance workers, security guards.

Question 37

Indirect materials

Answer 37

Materials used to support the production process - necessary for production.

eg cleaning supplies in car assembly plant, paintbrushes and ladders in decorating business.
Nails for a wooden furniture business, have such a negligible cost so count as indirect even though they can be traced.

Question 38

Total Cost

Answer 38

Direct Cost and Indirect Cost

Question 39

Direct Cost

Answer 39

Attributable to a single cost object

Question 40

Indirect Cost

Answer 40

Attributable to 2 or more cost objects.

Common to all products - in particular manufacturing overhead.

Cant be directly traced to one unit.

Overhead that supports the production.

Question 41

Prime cost

Answer 41

Direct materials and direct labour.

Cant produce anything without these.

Question 42

Conversion cost

Answer 42

Direct labour and manufacturing overhead.

Question 43

Non-manufacturing costs

Answer 43

Dont add any value to product but are needed for an organistion.
Not directly supporting production cost.

Marketing and selling costs - costs necessary to get the order and deliver the product.

Administrative costs - all executive/organisational costs that cannot be reasonable assigned to manufacturing or marketing.

R&D.