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
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.
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.
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.
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.
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.
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.
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.
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.
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 Manufacturing costs (continued) Direct labour: – works directly in converting raw materials into finished goods. Indirect manufacturing costs involve: – indirect labour – indirect materials – miscellaneous overhead.
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 Manufacturing overhead Manufacturing overhead is also known as indirect manufacturing costs and includes all costs other than direct materials and labour.
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 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.
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 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.