Accountancy 1B lecture Notes PDF

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Accountancy 1B Notes: Week 1: Lecture 2 Cost Classifications:   Manufacturing/Product Costs- Manufacturing costs are the costs incurred during the production of a product.  o Following are included in manufacturing costs:  Direct materials- are those materials and supplies tha...

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Accountancy 1B Notes: Week 1: Lecture 2

Cost Classifications: 

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Manufacturing/Product Costs- Manufacturing costs are the costs incurred during the production of a product. o Following are included in manufacturing costs:  Direct materials- are those materials and supplies that are consumed during the manufacture of a product  Direct labour- is production or services labour that is assigned to a specific product, cost centre, or work order.  Manufacturing overhead- refers to indirect factory-related costs that are incurred when a product is manufactured. Manufacturing overhead includes such things as the electricity used to operate the factory equipment, depreciation on the factory equipment and building, factory supplies and factory personnel (other than direct labour). o Prime Cost refers to direct materials + direct labour o Conversion Cost refers to direct labour +manufacturing overhead Non-Manufacturing costs/Period costs- We use the term "nonmanufacturing overhead costs" or "nonmanufacturing costs" to mean the Selling, General & Administrative expenses and Interest Expense. o Following are included in non-manufacturing/period costs:  Marketing/selling costs  Administrative costs

Treatment of Product and Period Costs: 

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Product Costs: Product cost refers to the costs used to create a product. These costs include direct labor, direct materials, consumable production supplies, and factory overhead. o Unsold → recorded as asset (stock) in balance sheet o Sold → recorded as expense in the trading account of the profit and loss statement Period Costs: Period costs are not a necessary part of the manufacturing process. As a result, period costs cannot be assigned to the products or to the cost of inventory. The period costs are usually associated with the selling function of the business or its general administration. o Always recorded as expense in the profit and loss statement The key difference between product costs and period costs is that products costs are only incurred if products are acquired or produced, and period costs are associated with the passage of time. Thus, a business that has no production or inventory purchasing activities will incur no product costs, but will still incur period costs.

Cost Classification According to Cost Behaviour:  

Explains how costs react to changes in production activity 3 broad types of costs: o Variable Costs- Variable costs are those costs that vary depending on a company's production volume  They rise as production increases and fall as production decreases.  Per Unit Cost remains constant though regardless of changes in activity  In a retail/distribution company example of variable goods sold would be cost of goods sold  In a manufacturing company it would be:  Direct materials  Direct labour  Variable manufacturing overhead e.g. power  Sales commission  Delivery costs  Clerical invoicing costs o Fixed Costs- costs that remain the same regardless of activity  Total fixed costs would remain constant regardless of changes in activity

Per unit cost would change in inverse proportion to changes in activity Examples of fixed costs include:  Committed Fixed Costs-These are long term costs to which the company remains committed. They rarely change regardless of the economic difficulties the company may suffer such as : o Factory insurance o Factory rent o Salaries of key personnel  Discretionary Fixed Costs - Once off cost which arises and is fixed in nature such as: o Advertising o Research o Staff Training Programme o Semi-variable costs- Partly variable and partly fixed relative to volume changes  Examples include:  Direct Labour Cost may include: o A basic fixed cost component of £20,000 p.a. salary; plus a variable bonus cost component based on achieving target sales/production levels  Telephone Cost includes: o A fixed line rental; plus a variable cost component based on number of calls. Other Cost Terms o Opportunity Cost:  The lost benefit arising from selecting one course of action over another. The opportunity cost of every decision needs to be evaluating in order to establish the total cost of an action. o Sunk Cost:  A cost that has already been incurred and that cannot be changed by any future decision. Sunk costs are irrelevant in decision making and should be ignored.  

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