More Cost Definitions Flashcards
What are costs in financial accounting?
Cost is a measure of resources used or given up to achieve a stated purpose
What is the change in our focus on costs?
Our focus changes from financial statement costs to product costs, which are the costs a company assigns to units produced
Define direct materials
Those materials that become an integral part of the product and that can be conveniently traced directly to it e.g tyres on car
Define direct labour
Those labour costs that can be easily traced to individual units of a product e.g wages paid to assembly workers
Define indirect labour
Wages paid to employees who are not directly involved in production work e.g security guards, supervisors, cleaners e.t.c
Define indirect materials
Materials necessary for production yet do not become part of the finished product e.g cleaning supplies in car assembly plant
What is total cost?
The sum of direct (attributable to a single cost object) and indirect costs (attributable to 2 or more cost objects)
What do you get if you combine direct materials and direct labour?
Prime Cost
What do you get if you combine direct labour and manufacturing overheard?
Conversion Cost
What are some examples of non-manufacturing costs?
- Marketing and selling costs - costs necessary to get and deliver product
- Administrative costs - all executive, organisational and clerical costs that cannot be assigned to manufacturing or marketing
What do product costs include?
Direct materials, direct labour and manufacturing overheard
Period costs
They are not included in product costs. They are written off to the Statement of Profit or Loss
What do we have in product costs and where are they recorded?
We have inventory, recorded in the Statement of Financial position, which, when converted to a sale, becomes cost of good sold, which is recorded in the Statement of Profit or Loss
What are period costs known as and where are they recorded?
An expense, that gets written off to the statement of profit or loss
What is the journey of product costs?
Product costs go into the statement of financial position as assets and only go through the Statement of Profit or Loss when they exit the business (are sold aka Cost of Goods sold)
