Principles of costing - lesson 2 calc of costs

Question 1

What are the differences between a production buisness and a non-production one

Answer 1

Non-production businesses: retail shops/online retailers. Do not manufacture a product from raw materials but buy and sell. Would store purchased goods in a warehouse. This is known as inventory

Production businesses: manufacturers. Produce things themselves and then sell them. Inventories are more complex as the inventory they hold are usually in various stages of completion, from raw materials to finished products.

Question 2

Answer 2

Question 3

Materials can be classified into direct and indirect materials. Define each

Answer 3

• Direct materials: raw materials purchased and ready to be used in production. Direct materials + direct labour = prime costs
• Indirect materials: production materials that don’t directly link to cost of producing product

Question 4

What are the three methods for the valuation process for raw materials

Answer 4

Question 5

What is FIFO method for determining value for raw materials

Answer 5

Uses the oldest available inventory and its purchase price (used for stuff with short shelf life)