Costs Flashcards
Comparing manufacturers and merchandisers
Merchandisers buy and sell finished goods
Manufacturers buy raw materials and produce and sell finished goods
Direct materials
Materials that become an integral part of the product and that can be conveniently traced directly to it
E.g. a radio installed in a car
Direct labour
Those labour costs that can be easily traced to individual units of product
E.g. wages paid to car assembly workers
Manufacturing overhead
Manufacturing costs that CANNOT be traced directly to specific units produced
E.g. indirect labour (wages paid to employees who are not directly involved in production work e.g. maintenance workers,cleaners etc) and indirect materials (materials used to support the production process e.g. cleaning supplies used in the assembly plant )
Classification of costs
Direct materials + direct labour = prime cost
Direct labour + manufacturing overhead = conversion cost
Non manufacturing costs
Marketing and selling costs - costs necessary to get the order and deliver the product
Administrative costs- all executive, organisational and clerical costs
Balance sheet for merchandiser and manufacturer
Merchandiser: Cash Debtors Prepaid expenses Merchandise stock
Manufacturers: Cash Debtors Prepaid expenses Stock: Raw materials Work in progress Finished goods
Profit and loss statement
Merchandiser: Cod of goods sold: Open Merchandise inventory \+ purchases Goods available for sale - ending Merch inv
= cost of goods sold
Manufacturer: Cost of goods sold: Open finished goods inv \+ costs of goods manufactured Goods available for sale - ending finished goods inv
= cost of goods sold
Costing in service organisations
Services cannot be stored as inventory
Service outputs often specially customised forna client
Services cannot be counted,measured, inspected, tested or verified in advance of sale
All these differences have had an effect on costing practices in service organisations
How will a cost react to a change in the level of business activity
Total variable costs change when activity changes
Per unit costs remains the same over wide ranges of activity
Total fixed costs remain unchanged when activity changes
Fixed costs per unit goes down as level of activity goes up
Differential costs and revenues
Costs and revenues that differ among alternative
E.g. your job pays £1500 a month in your hometown, you have an offer for a job in a neighbouring city offering £2000 a month, the commuting cost is £300 a month
Differential revenue is 2000-1500= 500
Differential cost is £300
Opportunity costs
The potential benefit that is given up when one alternative is selected over another
E.g. if you Weren’t attending university you could be earning £15,000 a year
Opp cost for attending uni for a year is £15000
Sunk costs
Sunk costs cannot be changed by any decision. They are not differential costs and should be ignored when making decisions
They have already been incurred
