1. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting for Business – A non-accountant’s guide 2/e by Jopling, Lucas and Norton Slides prepared by Rick Nieuwenhoven 7- 1 Chapter 7 Costing concepts

2. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting for Business – A non-accountant’s guide 2/e by Jopling, Lucas and Norton Slides prepared by Rick Nieuwenhoven 7- 2 Objectives Describe the role of product and service costing in various types of organisations. Define the following costing terms: – Fixed and variable cost – Direct and Indirect cost – Product and Period cost – Manufacturing costs. Discuss the difficulties associated with accounting for indirect manufacturing costs.

3. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting for Business – A non-accountant’s guide 2/e by Jopling, Lucas and Norton Slides prepared by Rick Nieuwenhoven 7- 3 Objectives (continued) Identify the different types of inventory associated with manufacturing. List and compare the key features of the following cost accounting systems: – Job costing – Process costing – Operations costing. Explain how inventories are valued under each of the costing systems.

4. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting for Business – A non-accountant’s guide 2/e by Jopling, Lucas and Norton Slides prepared by Rick Nieuwenhoven 7- 4 Product and service costing Cost information is used by management in order to: determine selling prices achieve a certain level of profit complete financial statements. Service costing is used by service firms and product costing is used by manufacturing firms.

5. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting for Business – A non-accountant’s guide 2/e by Jopling, Lucas and Norton Slides prepared by Rick Nieuwenhoven 7- 5 Costing terms Fixed costs: – remain fixed in total, regardless of activity. Variable costs: – have a direct relationship to product and change with production.

6. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting for Business – A non-accountant’s guide 2/e by Jopling, Lucas and Norton Slides prepared by Rick Nieuwenhoven 7- 6 Direct and indirect costs Direct costs: – can be easily traced to the manufacturing of a product – e.g. wood used in furniture. Indirect costs: – cannot be traced directly to a product being produced. – must be applied to a product using a base allocation.

7. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting for Business – A non-accountant’s guide 2/e by Jopling, Lucas and Norton Slides prepared by Rick Nieuwenhoven 7- 7 Product and period costs Product costs: – are manufacturing costs which are accumulated as inventories – include direct materials and labour. Period costs: – are all other costs of operating the business, expensed in the accounting period they are incurred. – e.g. general administrative, selling and financial.

8. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting for Business – A non-accountant’s guide 2/e by Jopling, Lucas and Norton Slides prepared by Rick Nieuwenhoven 7- 8 Manufacturing costs Manufacturing costs: – are incurred in manufacturing a product – include raw material and the costs of converting the raw material into the completed product. Three categories: – direct materials – direct labour – indirect manufacturing costs.

9. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting for Business – A non-accountant’s guide 2/e by Jopling, Lucas and Norton Slides prepared by Rick Nieuwenhoven 7- 9 Manufacturing costs (continued) Direct materials: – are raw materials used in production which becomes a significant part of the product being produced. Indirect materials: – are insignificant materials to production.

10. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting for Business – A non-accountant’s guide 2/e by Jopling, Lucas and Norton Slides prepared by Rick Nieuwenhoven 7- 10 Manufacturing costs (continued) Direct labour: – works directly in converting raw materials into finished goods. Indirect manufacturing costs involve: – indirect labour – indirect materials – miscellaneous overhead.

11. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting for Business – A non-accountant’s guide 2/e by Jopling, Lucas and Norton Slides prepared by Rick Nieuwenhoven 7- 11 Manufacturing overhead Manufacturing overhead is also known as indirect manufacturing costs and includes all costs other than direct materials and labour.

12. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting for Business – A non-accountant’s guide 2/e by Jopling, Lucas and Norton Slides prepared by Rick Nieuwenhoven 7- 12 Inventories associated with manufacturing organisations Finished goods are: – the end result of the production process. Raw materials are: – materials needed for the production process. Work in process is: – production which has been commenced but is incomplete.

13. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting for Business – A non-accountant’s guide 2/e by Jopling, Lucas and Norton Slides prepared by Rick Nieuwenhoven 7- 13 Cost accounting systems Job costing is: – used when each product or job is different. Process costing is – used for batch production or when large quantities of the same goods are being produced. Operations costing is: – a combination of process and job costing.