Cost Concepts Flashcards
Product Costs
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).
P/L
Profit/Loss
Period Costs
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).
Balance Sheet - Retailer
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.
Balance Sheet - Manufacturer
Current Assets: Cash Debtors Prepayments Stocks
Manufacturer Current Assets - Stocks
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.
IS
Income Statement
P/L account/IS - Retailer
Opening Stock + Purchases = Goods available
Goods available - Closing Stock = Costs of goods sold
Cost of goods sold match with sales gives gross profit
P/L account/IS - Manufacturer
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
FG stock
Fixed Goods Stock
Making decisions
Need to know profitability of products/services.
Profit
Revenue - Cost
Revenue - Cost
Profit
Opportunity Costs
The potential benefit that is given up when one alternative is selected over another.
Costs of goods manufactured - overall structure
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
Costs of goods manufactured - detailed structure
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
Differential costs and revenue
Costs and revenue that differ among alternatives
Sunk Costs
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.
Cost Classification
A matter of grouping together costs which share the same attributes relative to a stated cost objective.
Cost Objective
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.
Cost Object
Anything for which cost data are desired.
eg Unit of product/service, organisational deparaments.
Cost Objectives and Cost Classification
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)
Retailer activity
Buy finished goods.
Sell finished goods.
Dont make anything, nothing in work in progess.
Manufacturer activity
Buy raw materials.
Produce and sell finished goods.
Manufacturers
Design and manufacture products for sale.
Must accumulate costs of manufacturing products.
Inventory consists of materials, work in progress and finished goods.
Retailers
Purchase goods already manufactures and resell them.
Accumulate the purchased cost of goods.
Only have one type of inventory (merchandise), only for finished goods.
Balance sheet
Statement or organisational financial position - their assets.
Goods valued at production costs - classified as an asset.
Manufacturing and retail both report:
Cost of unsold goods on balance sheet.
Cost of goods sold on the P/L account and IS.
Retailing
Purchases + Opening stock
→
Cost of sales + Closing Stock
Closing stock → balance sheet - stocks.
Cost of sales → P/L account/IS - cost of sales.
Manufacturing
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.
Manufacturing cost concept
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.
Manufacturing Costs
Associated with the production function in a factory.
Direct Materials.
Direct Labour.
Manufacturing overhead.
Direct materials
Those materials that become an integral part of the product and that can be conveniently traced directly to it.
Direct Labour/Touch Labour
Those labour costs that can be easily traced to individual units of product.
eg wages paid to assembly workers.
Manufacturing overhead
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.
Indirect labour
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.
Indirect materials
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.
Total Cost
Direct Cost and Indirect Cost
Direct Cost
Attributable to a single cost object
Indirect Cost
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.
Prime cost
Direct materials and direct labour.
Cant produce anything without these.
Conversion cost
Direct labour and manufacturing overhead.
Non-manufacturing costs
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.
