Professional Documents
Culture Documents
Cost classification
Product/service cost consists of:
- Material costs
- Labor costs
- Other expenses:
o Rent/interest rates
o Electricity/gas bill
o Depreciation
Total cost
Total cost = direct cost + indirect cost
Direct material
Is any composition of a product, include:
- Component parts
- Semi-finished work: eg SFG moved from plant A to plant B to continue production is direct
material cost in plant B
- Primary packing materials
Direct labor
Pay (both normal time & overtime) of labors who spend time on production.
- Ratio of Labor costs to production cost decreases when use of machinery increases hence
depreciation increases
- Skillful labor costs & sub-contractors’ costs increases when labor costs decreases
- Hire of tools
- Repair of tools
Production Overhead (factory overhead)
Includes:
Administration overhead
Eg:
Selling overhead
Eg:
Distribution overhead
Eg:
- Packing costs
- Salaries of packers, drivers, …
- Rent, insurance of warehouse
Costs by function
Traditional costing system, costs are classified as below:
Functional costs
Types of functional costs:
- Production costs:
o Involve from supply of material to completion of manufacture of FG that is ready to kept
warehouse
o Packing cost: only primary packing
- Admin costs
- Selling costs
- Distribution costs
- Research costs
- Financing costs
Eg:
Profit = (40-21)*50
Closing inventory value = (100-50)*21
Cost units
Unit cost of a product/service
Cost objects
Cost object is anything for which cost measurement is desired
Cost of something St = object
Profit centers
Like in SAP, accountable for costs & revenues
Revenue centers
Accountable for revenues only
Investment centers
Responsible for capital investment (possibly also for financing) & return in investment
Responsibility centers
Cost centers, profit centers, investment centers… are responsibility centers.
Cost behavior
Definition
Cost behavior is way in which costs vary depending on changes in output level.
Application
Application of studying cost behavior
- Budgeting
- Decision-making
Levels of activity
Eg:
- No. FG produced
- No. items sold
- Value of items sold
Fixed costs are period charges, so they depend on period rather than output.
Step costs
Fixed only for a particular level of activity.
Eg: cost of producing fewer 1000 units is different from cost of producing more 1000 units.
Graphic be like:
Variable costs
Vary proportionally to output level.
Each unit of output causes a more proportional increase in these variable costs
Semi-variable costs
Partly affected by changes in output level.
Eg:
Formulas:
Material costs
Inventory classification
- Raw materials
- FGs
- Work in progress WIP
- Spare parts/consumables
Free inventory
Manager needs to know balance of free inventory
Formula:
free inv = materials in inv + materials on order from vendors – materials requisitioned but not yet issued
Inventory count
Physically count on continuous- or period-basis.
- Continuous counting: count a number of items on a rotating basis. Each item is checked at least
once a year.
Obsolete inv
Out of date, need to be written off & disposed.
Wastage
Inv that is wasted, eg broken
Slow-moving
Item that takes long time to use up
- Purchase costs
- Holding costs
- Ordering costs
- Costs of running out inventory
Holding costs
- Storage costs & warehouse operations: cost of storing & paying staff in warehouse
- Interests: interest on capital used to hold inventories
- Insurance costs
- Risk of obsolescence
- Deterioration: item deteriorates (no longer can be used)
3 critical levels:
- Reorder level
- Minimum level
- Maximum level
Reorder level
Formula
Lead time = period between placing an order and items available for use
Minimum level
Warning level that stockout can occur
Formula:
Maximum level
Warning level that wasteful level can occur
Formula:
Max level = reorder level + reorder quantity – min usage * min lead time
P128. F2
Labor costs
Production vs. productivity
- Improve production
o OT
o Sub-contracting work to outside firm
o Hiring extra staff
o Manage workforce
- Improve productivity
o Cancelling OT
o Laying off staff
Eg:
Company budgets to make 25.000 units of output (in 4 hours each) in 100.000 hrs.
Production is more than budgeted output since increase in capacity offsets decrease in
efficiency.
Remuneration method
Method to determine:
- Cost of FG
- Morale & efficiency of employees
Labor turnover
Costs caused by labor turnover:
- Replacement costs
- Preventative costs: costs to prevent employees from leaving
Overheads
Overheads include:
- Indirect materials
- Indirect labor
- Indirect expenses
- Production
- Administration
- Selling & distribution
- Marginal costing
- Absorption costing
Absorption costing
Overheads are distributed on a fair basis to total cost of production of each unit.
Non-manufacturing overheads
Allocation reason
External reporting: non-manufacturing overheads needn’t be allocated to product cost, rather they are
considered period costs.
Internal reporting:
Rule to allocate
Method 1
Use SKF as for manufacturing costs eg direct labor hours, direct machine hours…
Method 2
Marginal costing
Only variable costs are added into production cost, while fixed costs are considered period expenses.
- Direct material
- Direct labor
- Variable production overheads