The document discusses materials costing and control. It defines direct and indirect materials and explains how materials are accounted for as they move through the production process. It also covers determining the optimal purchase quantity to minimize total inventory costs, identifying stock losses through periodic stocktaking, and accounting for discrepancies between physical and book stock values.
Overhead costs are indirect expenses that are incurred in addition to direct material and direct labor costs. They include indirect materials, indirect labor, and indirect expenses. Overheads must be classified, collected, allocated to cost centers, and then absorbed or charged to production units. They are classified as factory, office/administrative, or selling/distribution overheads. Overhead allocation involves allotting whole costs to cost centers, while apportionment involves allotting proportionate shares of common costs between cost centers. Absorption of overheads involves charging production with an equitable share of overhead costs using an absorption rate.
This document summarizes the key principles of IAS 2 regarding the accounting treatment for inventories. It defines inventories as assets held for sale, in production, or as materials/supplies. Inventories must be measured at the lower of cost or net realizable value, where net realizable value is the estimated selling price less costs to complete and sell. Cost includes purchase costs, conversion costs, and other costs to bring inventories to their present condition and location. Certain costs like abnormal losses or selling costs are excluded.
01.Understand the concept of ‘Overheads’.
02.Understand classification, allocation, apportionment and absorption of overheads.
03. Understand the Primary and Secondary Distribution of Overheads.
04. Understand the Traditional & Activity Based Costing methods
05. Identify the value added & non value added activity
This document summarizes International Accounting Standard 2 (IAS 2) which provides guidance on accounting for inventories. The key points are:
1) IAS 2 defines inventory as assets held for sale, in production, or in the form of materials used in production. It establishes cost as the default basis for valuing inventories.
2) Cost is determined using purchase costs, conversion costs, and other costs to bring inventory to its present condition and location. Net realizable value provides the floor for the valuation of inventory.
3) IAS 2 allows different cost flow assumptions - FIFO, LIFO, weighted average - and requires specific disclosures about inventory amounts, costs, and accounting policies.
This document discusses cost allocation methods and frameworks. It provides 4 types of cost objectives: service departments, producing departments, products/services, and customers. It describes direct and indirect costs and how they are allocated using cost drivers. It also discusses the direct and step-down methods for allocating service department costs and reciprocal services. Finally, it covers allocating costs associated with customers to determine customer profitability.
The document discusses IAS 2, which provides guidance on accounting for inventories. It defines inventories as assets held for sale, in production, or in the form of materials or supplies. The cost of inventories includes purchase costs, conversion costs, and other costs to bring them to their present location and condition. Inventories must be measured at the lower of cost or net realizable value.
Standard costs are developed using formulas, supplier lists, or time studies and compared to actual costs to calculate variances which should be investigated if significant, with variances for direct materials including price, quantity, mix and yield and variances for direct labor including rate, efficiency, mix, yield and idle time.
This document provides an overview of accounting standards for inventories according to IAS 2. It defines inventories as assets held for sale, in production, or as supplies. The objectives of IAS 2 are to prescribe accounting treatments for inventories. Inventories must be measured at the lower of cost or net realizable value, using methods like FIFO, LIFO, or weighted average. The document outlines costs that are included in inventory valuation and disclosure requirements.
Overhead costs are indirect expenses that are incurred in addition to direct material and direct labor costs. They include indirect materials, indirect labor, and indirect expenses. Overheads must be classified, collected, allocated to cost centers, and then absorbed or charged to production units. They are classified as factory, office/administrative, or selling/distribution overheads. Overhead allocation involves allotting whole costs to cost centers, while apportionment involves allotting proportionate shares of common costs between cost centers. Absorption of overheads involves charging production with an equitable share of overhead costs using an absorption rate.
This document summarizes the key principles of IAS 2 regarding the accounting treatment for inventories. It defines inventories as assets held for sale, in production, or as materials/supplies. Inventories must be measured at the lower of cost or net realizable value, where net realizable value is the estimated selling price less costs to complete and sell. Cost includes purchase costs, conversion costs, and other costs to bring inventories to their present condition and location. Certain costs like abnormal losses or selling costs are excluded.
01.Understand the concept of ‘Overheads’.
02.Understand classification, allocation, apportionment and absorption of overheads.
03. Understand the Primary and Secondary Distribution of Overheads.
04. Understand the Traditional & Activity Based Costing methods
05. Identify the value added & non value added activity
This document summarizes International Accounting Standard 2 (IAS 2) which provides guidance on accounting for inventories. The key points are:
1) IAS 2 defines inventory as assets held for sale, in production, or in the form of materials used in production. It establishes cost as the default basis for valuing inventories.
2) Cost is determined using purchase costs, conversion costs, and other costs to bring inventory to its present condition and location. Net realizable value provides the floor for the valuation of inventory.
3) IAS 2 allows different cost flow assumptions - FIFO, LIFO, weighted average - and requires specific disclosures about inventory amounts, costs, and accounting policies.
This document discusses cost allocation methods and frameworks. It provides 4 types of cost objectives: service departments, producing departments, products/services, and customers. It describes direct and indirect costs and how they are allocated using cost drivers. It also discusses the direct and step-down methods for allocating service department costs and reciprocal services. Finally, it covers allocating costs associated with customers to determine customer profitability.
The document discusses IAS 2, which provides guidance on accounting for inventories. It defines inventories as assets held for sale, in production, or in the form of materials or supplies. The cost of inventories includes purchase costs, conversion costs, and other costs to bring them to their present location and condition. Inventories must be measured at the lower of cost or net realizable value.
Standard costs are developed using formulas, supplier lists, or time studies and compared to actual costs to calculate variances which should be investigated if significant, with variances for direct materials including price, quantity, mix and yield and variances for direct labor including rate, efficiency, mix, yield and idle time.
This document provides an overview of accounting standards for inventories according to IAS 2. It defines inventories as assets held for sale, in production, or as supplies. The objectives of IAS 2 are to prescribe accounting treatments for inventories. Inventories must be measured at the lower of cost or net realizable value, using methods like FIFO, LIFO, or weighted average. The document outlines costs that are included in inventory valuation and disclosure requirements.
The process of inventory accounting and its needs is explained in this PPT presentation. An Inventory appears in two principal financial statements. They are Income Statement and Balance Sheet. “Financial Accounting” lesson bought to you by Welingkar’s Distance Learning Division.
For more such innovative content on management studies, join WeSchool PGDM-DLP Program: http://bit.ly/SlideshareFaccounting
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Absorption/Variable Costing and Cost-Volume-Profit Analysisnarman1402
This chapter discusses absorption and variable costing approaches and how they differ in classifying and presenting costs. It also covers cost-volume-profit analysis, which examines the relationship between sales revenue, costs, and production volume. Companies use cost-volume-profit analysis to calculate break-even points, set target profits, and answer "what-if" questions. The underlying assumptions are that costs and revenues remain constant and that the company operates within a relevant range.
This document discusses overhead costs and their accounting treatment. It defines overheads as indirect costs that cannot be directly attributed to a specific cost object. The document outlines the key steps in overhead accounting: classification of overheads, codification and collection, allocation and apportionment to cost centers, and absorption into product costs. It provides examples of different bases for classifying, allocating, and apportioning overheads. The document also discusses reapportioning service department costs to production departments through various secondary distribution methods like repeated distribution and trial and error.
Job order costing tracks costs for individual jobs or orders, while process costing tracks costs for an entire production process. There are three valuation methods for measuring product costs: actual costing uses actual costs incurred, normal costing uses standard costs for overhead, and standard costing uses predetermined standard costs for materials, labor, and overhead. The job order cost sheet accumulates all costs for an individual job, including direct materials and labor costs from requisition forms and time sheets, applied overhead, and budgeted versus actual cost comparisons.
Standard costing is a technique that uses predetermined standards for costs and revenues to control performance through variance analysis. Standards are established for inputs and outputs and are used to assess performance, control costs, motivate staff, and provide guidance to improve performance. Variances measure the difference between actual and standard costs and revenues and are classified into material, labor, overhead, and sales categories to identify reasons for non-standard performance. Material variances include price, usage, mix, and yield components.
This document discusses job costing and batch costing. Job costing involves compiling costs for specific quantities of goods or services produced according to a customer's order. Costs are accumulated separately for each job. Batch costing is used when a company produces goods in batches for stock. The cost per unit is determined by dividing the total batch cost by the number of units in the batch. The document outlines the key features, objectives, advantages, and disadvantages of job costing as well as providing examples of job cost sheets and how to calculate economic batch size.
This document discusses inventory valuation. It defines inventory as assets held for sale, in production, or to be consumed in production or services. There are three main types of inventory: finished goods, work-in-progress, and raw materials/stores. The key methods for valuing inventory are FIFO, LIFO, and weighted average cost. FIFO matches oldest costs to goods sold while LIFO matches newest costs, affecting reported profits. Weighted average smoothes price fluctuations by using average unit costs. The lower of historical cost or net realizable value is the primary valuation standard.
This document provides an overview of cost and management accounting. It defines cost accounting as a system for recording costs and producing cost information for products. It also discusses why organizations need costing systems to provide actual unit costs, actual department costs, and forecast costs for planning, decision making, and cost control. The document then covers key terms in cost accounting such as cost, cost units, cost centers, cost objects, and classifications of costs by nature, function, behavior, and changes in activity or volume.
Job costing and process costing are two types of costing methods. Job costing is used when production is done in small batches to meet specific customer orders, with identifiable units tracked through production. Process costing is used for continuous production like chemicals, where costs are averaged over total units produced. Key differences are job costing tracks individual jobs while process costing averages costs over production batches. Both aim to determine accurate costs to measure profitability.
This document provides an overview of IAS 2 on inventory. It discusses the objective and scope of IAS 2, which is to prescribe the accounting treatment for inventory. Key areas covered include measurement of inventory at the lower of cost or net realizable value, techniques for determining cost, and required disclosures. Measurement of inventory requires identifying applicable costs and allocating fixed and variable production overheads. Inventory is recognized as an expense when the related revenue is recognized.
This document provides an overview of IAS 2 on inventories. The objectives of IAS 2 are to prescribe the accounting treatment for inventories and determine the amount of cost to be recognized as an asset. Inventories are assets held for sale, in production, or in the form of materials used in production. Inventories must be measured at the lower of cost or net realizable value. Cost includes all purchase, conversion and other costs to bring inventories to their present condition. Inventories are recognized as an expense when sold. Financial statement disclosures on inventories are also required.
Adjusting entries bring account balances up to date at the end of an accounting period by recording changes that have not been entered in the accounting records, such as items that have been deferred or accrued. Adjusting entries are necessary when using accrual basis accounting to adhere to the matching principle. Adjusting entries are internal transactions that do not have a source document and involve at least one income statement and one balance sheet account, but do not affect the cash account.
Process costing explained with examples free of cost .It is for students of managerial accounting ,read this to quickly go through process costing.
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The standard provides guidance on accounting for inventories. It defines inventories as assets held for sale, in production for sale, or materials used in production. Inventories must be measured at the lower of cost and net realizable value, with cost determined using purchase cost, conversion cost, or formulas like FIFO or weighted average. If net realizable value falls below cost, inventories must be written down with the loss recognized in profit or loss. Entities must disclose information about inventory accounting policies, measurements, and write-downs.
This document discusses job costing, including its definition, purpose, characteristics, applicability, differences from process costing, basic terminology, the seven steps of job costing, related journal entries, and an example problem involving actual, normal, and variance costing for a job. Job costing involves collecting and assigning costs to identifiable jobs or orders, and is used when production involves made-to-order or custom goods of short duration. It helps with planning, cost control, and decision making.
Managerial accounting provides non-financial information to internal managers for planning and control. It differs from financial accounting in its users, time focus, emphasis, and subject focus. Costs can be classified in various ways including by behavior, relevance, controllability, traceability, and function. Managerial accounting systems include job order costing for custom jobs and process costing for mass production. Costs are allocated using plant-wide rates, two-stage allocation, or activity-based costing to assign overhead to products or services.
The document discusses various cost concepts and classifications including:
- Fixed vs direct vs variable costs and functional vs behavioral costs
- Cost classifications such as functional (materials, labor, overhead) and behavioral (fixed, variable) costs
- Cost relationships in a manufacturing company's income statement and how costs flow through work-in-process and finished goods inventory
- Different cost behavior patterns such as total fixed costs, committed fixed costs, total variable costs, total mixed costs, and total step costs
- Methods for separating mixed costs into fixed and variable components
- The impact of computers on manufacturing through technologies like automatic identification systems, computer-aided design, computer-aided manufacturing, flexible manufacturing systems, and computer-integr
Effective store keeping and successful inventory control.2Tajudeen Wahabi
Store keeping involves accounting for stock including raw materials, work-in-progress, finished goods, and some fixed assets. Materials are received through various modes of transportation and verified before being accounted for in stores. Different machines like forklifts and overhead cranes are used to carry and store heavy materials. Once materials are received, a goods receipt note is prepared to record the receipt and enable supplier payment. Materials are stored properly according to type in various stores and sub-stores for security, easy retrieval and handling. Inventory management aims to maintain adequate supply to meet demand while minimizing total costs of holding, ordering and shortage. Key terms include maximum limit, minimum limit, reorder level, and safety stock.
This document discusses different types of materials used in production including raw materials, work in progress, and finished goods. It also covers inventory control processes like ordering, receiving, and issuing materials. Key aspects summarized include the different stock control levels used like reorder level and economic order quantity, which aims to minimize total holding and ordering costs. Recording inventory accurately through methods like bin cards and ledger accounts is also emphasized.
The process of inventory accounting and its needs is explained in this PPT presentation. An Inventory appears in two principal financial statements. They are Income Statement and Balance Sheet. “Financial Accounting” lesson bought to you by Welingkar’s Distance Learning Division.
For more such innovative content on management studies, join WeSchool PGDM-DLP Program: http://bit.ly/SlideshareFaccounting
Join us on Facebook: http://www.facebook.com/welearnindia
Follow us on Twitter: https://twitter.com/WeLearnIndia
Read our latest blog at: http://welearnindia.wordpress.com
Subscribe to our Slideshare Channel: http://www.slideshare.net/welingkarDLP
Absorption/Variable Costing and Cost-Volume-Profit Analysisnarman1402
This chapter discusses absorption and variable costing approaches and how they differ in classifying and presenting costs. It also covers cost-volume-profit analysis, which examines the relationship between sales revenue, costs, and production volume. Companies use cost-volume-profit analysis to calculate break-even points, set target profits, and answer "what-if" questions. The underlying assumptions are that costs and revenues remain constant and that the company operates within a relevant range.
This document discusses overhead costs and their accounting treatment. It defines overheads as indirect costs that cannot be directly attributed to a specific cost object. The document outlines the key steps in overhead accounting: classification of overheads, codification and collection, allocation and apportionment to cost centers, and absorption into product costs. It provides examples of different bases for classifying, allocating, and apportioning overheads. The document also discusses reapportioning service department costs to production departments through various secondary distribution methods like repeated distribution and trial and error.
Job order costing tracks costs for individual jobs or orders, while process costing tracks costs for an entire production process. There are three valuation methods for measuring product costs: actual costing uses actual costs incurred, normal costing uses standard costs for overhead, and standard costing uses predetermined standard costs for materials, labor, and overhead. The job order cost sheet accumulates all costs for an individual job, including direct materials and labor costs from requisition forms and time sheets, applied overhead, and budgeted versus actual cost comparisons.
Standard costing is a technique that uses predetermined standards for costs and revenues to control performance through variance analysis. Standards are established for inputs and outputs and are used to assess performance, control costs, motivate staff, and provide guidance to improve performance. Variances measure the difference between actual and standard costs and revenues and are classified into material, labor, overhead, and sales categories to identify reasons for non-standard performance. Material variances include price, usage, mix, and yield components.
This document discusses job costing and batch costing. Job costing involves compiling costs for specific quantities of goods or services produced according to a customer's order. Costs are accumulated separately for each job. Batch costing is used when a company produces goods in batches for stock. The cost per unit is determined by dividing the total batch cost by the number of units in the batch. The document outlines the key features, objectives, advantages, and disadvantages of job costing as well as providing examples of job cost sheets and how to calculate economic batch size.
This document discusses inventory valuation. It defines inventory as assets held for sale, in production, or to be consumed in production or services. There are three main types of inventory: finished goods, work-in-progress, and raw materials/stores. The key methods for valuing inventory are FIFO, LIFO, and weighted average cost. FIFO matches oldest costs to goods sold while LIFO matches newest costs, affecting reported profits. Weighted average smoothes price fluctuations by using average unit costs. The lower of historical cost or net realizable value is the primary valuation standard.
This document provides an overview of cost and management accounting. It defines cost accounting as a system for recording costs and producing cost information for products. It also discusses why organizations need costing systems to provide actual unit costs, actual department costs, and forecast costs for planning, decision making, and cost control. The document then covers key terms in cost accounting such as cost, cost units, cost centers, cost objects, and classifications of costs by nature, function, behavior, and changes in activity or volume.
Job costing and process costing are two types of costing methods. Job costing is used when production is done in small batches to meet specific customer orders, with identifiable units tracked through production. Process costing is used for continuous production like chemicals, where costs are averaged over total units produced. Key differences are job costing tracks individual jobs while process costing averages costs over production batches. Both aim to determine accurate costs to measure profitability.
This document provides an overview of IAS 2 on inventory. It discusses the objective and scope of IAS 2, which is to prescribe the accounting treatment for inventory. Key areas covered include measurement of inventory at the lower of cost or net realizable value, techniques for determining cost, and required disclosures. Measurement of inventory requires identifying applicable costs and allocating fixed and variable production overheads. Inventory is recognized as an expense when the related revenue is recognized.
This document provides an overview of IAS 2 on inventories. The objectives of IAS 2 are to prescribe the accounting treatment for inventories and determine the amount of cost to be recognized as an asset. Inventories are assets held for sale, in production, or in the form of materials used in production. Inventories must be measured at the lower of cost or net realizable value. Cost includes all purchase, conversion and other costs to bring inventories to their present condition. Inventories are recognized as an expense when sold. Financial statement disclosures on inventories are also required.
Adjusting entries bring account balances up to date at the end of an accounting period by recording changes that have not been entered in the accounting records, such as items that have been deferred or accrued. Adjusting entries are necessary when using accrual basis accounting to adhere to the matching principle. Adjusting entries are internal transactions that do not have a source document and involve at least one income statement and one balance sheet account, but do not affect the cash account.
Process costing explained with examples free of cost .It is for students of managerial accounting ,read this to quickly go through process costing.
http://www.brightscholarships.com
Twitter @scholarshipskys
The standard provides guidance on accounting for inventories. It defines inventories as assets held for sale, in production for sale, or materials used in production. Inventories must be measured at the lower of cost and net realizable value, with cost determined using purchase cost, conversion cost, or formulas like FIFO or weighted average. If net realizable value falls below cost, inventories must be written down with the loss recognized in profit or loss. Entities must disclose information about inventory accounting policies, measurements, and write-downs.
This document discusses job costing, including its definition, purpose, characteristics, applicability, differences from process costing, basic terminology, the seven steps of job costing, related journal entries, and an example problem involving actual, normal, and variance costing for a job. Job costing involves collecting and assigning costs to identifiable jobs or orders, and is used when production involves made-to-order or custom goods of short duration. It helps with planning, cost control, and decision making.
Managerial accounting provides non-financial information to internal managers for planning and control. It differs from financial accounting in its users, time focus, emphasis, and subject focus. Costs can be classified in various ways including by behavior, relevance, controllability, traceability, and function. Managerial accounting systems include job order costing for custom jobs and process costing for mass production. Costs are allocated using plant-wide rates, two-stage allocation, or activity-based costing to assign overhead to products or services.
The document discusses various cost concepts and classifications including:
- Fixed vs direct vs variable costs and functional vs behavioral costs
- Cost classifications such as functional (materials, labor, overhead) and behavioral (fixed, variable) costs
- Cost relationships in a manufacturing company's income statement and how costs flow through work-in-process and finished goods inventory
- Different cost behavior patterns such as total fixed costs, committed fixed costs, total variable costs, total mixed costs, and total step costs
- Methods for separating mixed costs into fixed and variable components
- The impact of computers on manufacturing through technologies like automatic identification systems, computer-aided design, computer-aided manufacturing, flexible manufacturing systems, and computer-integr
Effective store keeping and successful inventory control.2Tajudeen Wahabi
Store keeping involves accounting for stock including raw materials, work-in-progress, finished goods, and some fixed assets. Materials are received through various modes of transportation and verified before being accounted for in stores. Different machines like forklifts and overhead cranes are used to carry and store heavy materials. Once materials are received, a goods receipt note is prepared to record the receipt and enable supplier payment. Materials are stored properly according to type in various stores and sub-stores for security, easy retrieval and handling. Inventory management aims to maintain adequate supply to meet demand while minimizing total costs of holding, ordering and shortage. Key terms include maximum limit, minimum limit, reorder level, and safety stock.
This document discusses different types of materials used in production including raw materials, work in progress, and finished goods. It also covers inventory control processes like ordering, receiving, and issuing materials. Key aspects summarized include the different stock control levels used like reorder level and economic order quantity, which aims to minimize total holding and ordering costs. Recording inventory accurately through methods like bin cards and ledger accounts is also emphasized.
This document outlines an information technology training program submitted by Pawan Yadav. It discusses the objectives and requirements of material control, including elements like material procurement, storage, and usage control. Specifically, it describes the material procurement procedure involving bills of materials, requisitions, purchase orders, quotations, and receiving/inspecting deliveries. It also covers inventory control methods like setting quantitative levels, classification, ratio analysis, and physical controls like bin cards and two-bin systems. The training program aims to provide Pawan with skills in systematically managing and regulating materials for optimal production.
1. The document discusses inventory control and types of inventories including direct, indirect, raw materials, bought out parts, work-in-process, finished goods, maintenance stores, and tools.
2. It describes inventory models including static, dynamic, deterministic, and probabilistic models. It also discusses inventory costs like purchasing, ordering, carrying, and shortage costs.
3. The economic ordered quantity is introduced as the quantity that minimizes total costs. Different purchase methods like requirements-based, future period, market, and rate contract purchasing are also summarized.
This document discusses various inventory management techniques. It begins by defining inventory and inventory management. It then lists the objectives of inventory management and describes several tools used, including fixing maximum, minimum, re-order, and danger levels. Additional tools discussed include ABC analysis, EOQ, perpetual inventory systems, VED analysis, FSN analysis, and periodic inventory evaluation. The document also outlines various costs associated with inventory like financial, storage, price fluctuation, and obsolescence costs. Finally, it briefly describes several inventory management methods such as min-max, automatic order systems, just-in-time, ordering cycle, inventory turnover ratio, and input-output ratio analysis.
This document defines inventory and discusses inventory control. It defines inventory as raw materials, work in progress, and finished goods. Inventory control aims to maintain optimal inventory levels for smooth operations. Inventories are classified and objectives of inventory control include avoiding over/under investment and providing the right goods at the right time. Operating objectives focus on availability, minimizing waste, and customer service, while financial objectives focus on costs. Inventory management aims to balance ordering costs, carrying costs, and stockout costs.
The document discusses various concepts related to materials management and costing. It defines key terms like cost, cost accounting, objectives of cost accounting. It describes different cost classification methods, materials control techniques like bin cards, store ledgers. It explains concepts of economic order quantity, reorder level, maximum and minimum levels. Finally, it summarizes different inventory valuation methods like FIFO, LIFO, simple and weighted average.
This document discusses key concepts in materials management and cost accounting. It defines cost, cost accounting, and their objectives. It describes different cost elements and classification methods. It also explains important materials management concepts like bin cards, store ledgers, economic order quantity, and inventory levels. Lastly, it discusses two inventory valuation methods - FIFO and LIFO.
The document discusses various concepts related to materials management and costing. It defines key terms like cost, cost accounting, objectives of cost accounting. It describes different cost classification methods, materials control techniques like bin cards, store ledgers. It explains concepts of economic order quantity, reorder level, maximum and minimum levels. Finally, it discusses different inventory valuation methods like FIFO, LIFO, simple and weighted average.
This document discusses concepts related to materials management and cost accounting. It defines key terms like cost, cost accounting, cost elements, and objectives of cost accounting. It describes different cost accounting techniques like bin cards, store ledgers, bills of materials, and stock valuation methods. It also discusses concepts of economic order quantity, reorder levels, and materials management techniques like ABC analysis. The purpose is to explain the process of materials management and cost accounting.
This document discusses material control and inventory management. It defines key terms like materials, inventory, and different stock levels. It describes the objectives and operations of material control like purchasing, inspection, and storage of materials. Methods to determine economic order quantity, set stock levels like reorder point, minimum and maximum levels are presented. Documentation for material procurement, storage, and issuance are covered. Pricing methods for materials issued like FIFO, LIFO, simple average and weighted average are also summarized.
This document discusses inventory management. It defines inventory and describes the variables involved in inventory problems including controlled variables like order quantity and timing, and uncontrolled variables like costs. It describes the objectives of inventory management as maintaining optimal inventory levels to maximize profitability. Different types of inventories like raw materials, work in progress, and finished goods are explained. The functions and importance of inventory management are provided along with methods like periodic review and fixed order quantity systems. The economic order quantity model and assumptions are outlined.
This document discusses inventory control models and the concept of economic order quantity (EOQ). It defines inventory as any stored resources used to satisfy current or future needs. Maintaining inventory involves costs like capital costs, storage and handling costs, and risks of price declines or obsolescence. EOQ is the order quantity that minimizes total inventory costs, which are comprised of ordering costs and carrying costs. The EOQ formula balances these two costs and can help determine the optimal order quantity. Assumptions for using EOQ include stable prices and demand. Quality discounts may also impact optimal inventory levels. An example calculation demonstrates how to apply the EOQ formula.
This document discusses working capital management as it relates to materials. It outlines the importance of proper material control systems and procedures for procurement, storage, and inventory management. Key aspects covered include establishing requirements for coordination, purchasing, budgeting, storage, and reporting. The document then describes procedures for material procurement, receipt, inspection, and payment. It also outlines procedures for material issues, returns, and storage. Finally, it discusses inventory control methods like economic order quantity and just-in-time, as well as reviewing slow and non-moving inventory items.
inventory control seminar FOR MANAGEMENT STUDENT.pptxApurva Dwivedi
This document summarizes a seminar on inventory control presented by Apurva Dwivedi. It defines inventory and describes the different types including raw materials, work in progress, and finished goods. It then discusses official and unofficial inventory in hospitals. Key concepts of inventory control are explained like periodic review systems, two bin systems, lead time, minimum stock levels, maximum order levels, and reorder levels. Inventory costs including ordering, carrying, and shortage costs are also summarized. The document concludes with selective inventory control methods and condemnation and disposal of inventory.
This document discusses inventory valuation methods. It defines inventory as assets held for sale, in production, or as materials. The key inventory valuation methods are periodic, which counts inventory annually, and perpetual, which counts continuously. Cost flow methods like FIFO and LIFO assign costs based on assumed flow of goods. FIFO uses oldest costs first while LIFO uses newest costs first. Weighted average assigns an average cost. The methods impact profit differently based on price trends. International standards require lower of cost or net realizable value for valuation.
I. A biscuit manufacturing company buys 10,000 bags of wheat annually. The cost per bag is Rs. 500 and ordering cost is Rs. 400. Inventory carrying cost is estimated at 10% of wheat price. The number of orders to be placed during the year is calculated.
II. An automobile workshop's annual demand for shock absorbers is 4800 units. Unit price is Rs 300. Ordering cost is Rs 50. Storage cost is 3% annually and interest rate is 15%. The EOQ and number of orders are calculated.
III. Given data on normal usage, minimum usage, maximum usage and lead time for a component, reorder level, maximum inventory level and minimum inventory level are calculated.
This document provides an overview of inventories for financial accounting purposes. It discusses the components of ending inventory, cost components included in inventory valuation, acceptable inventory cost measurement methods (specific identification, FIFO, LIFO, weighted average), inventory systems (perpetual vs. periodic), costing methods, valuation at lower of cost or net realizable value, potential errors in inventory, and estimation methods (gross profit, retail price). The document aims to comprehensively cover the accounting concepts and standards related to inventory valuation and financial reporting.
Cost accounting is the process of tracking and recording costs related to manufacturing or producing goods and services. It helps determine the actual costs of production and allows for cost control and cost reduction. The key objectives of cost accounting are cost ascertainment, fixation of selling prices, cost control, matching costs with revenues, and preparation of financial statements. Proper material control and purchase control are important aspects of cost accounting that help ensure the right quality and quantity of materials are procured at optimal prices and stored efficiently.
This document describes process costing methods. It covers 5 steps in process costing: 1) summarizing physical units, 2) computing equivalent units, 3) computing equivalent unit costs, 4) summarizing total costs, and 5) assigning costs to completed units and work-in-process inventory. It provides examples of using the weighted average and FIFO methods for a company with two production departments, showing how to calculate equivalent units, costs, and journal entries under each method.
Job costing is a method of costing used when production is done according to specific customer orders rather than for stock. Key aspects include: each job has unique characteristics requiring special treatment; costs are tracked by job and determined after completion; work in progress varies depending on number of active jobs. Job costing helps determine profit/loss on each job, estimate future job costs, control efficiency, and value work in progress. Advantages include cost analysis and control, determining profitable jobs, and estimating costs for future planning. Disadvantages include clerical work, risk of error, and difficulty with cost comparisons over time.
This document discusses accounting for factory overhead costs. It covers identifying variable and fixed overhead costs, budgeting overhead, accumulating actual overhead costs, applying overhead to production using predetermined overhead rates, and accounting for differences between actual and applied overhead. Methods discussed include direct labor cost rate, direct labor hour rate, and activity-based costing. The document also addresses distributing service department costs and treating under- or over-applied overhead.
This document discusses accounting for labor costs. It covers topics such as direct and indirect labor costs, hourly and piece-rate payment plans, payroll procedures, recording of labor time and costs, and accounting entries. Payroll costs are initially recorded through journal entries that allocate wages to accounts like work in process, overhead, and liabilities for taxes. Labor costs then flow from time records to job cost and overhead ledgers to the general ledger.
This document discusses process costing and compares it to job order costing. Process costing is used when a company mass produces uniform products continuously. Costs are tracked by production department rather than individual jobs. Equivalent units of production are calculated using the weighted average method to determine the cost per unit. The key document is the production cost report which shows quantity, costs and unit costs by department. A comprehensive example is provided to illustrate calculating equivalent units, unit costs and completing a production cost report for the mixing department of a company that makes waffles.
Management accounting provides information to managers for planning, control, and evaluation. It has become increasingly important as organizations face new trends like customer focus, quality focus, and short product life cycles. Management accounting is less regulated than financial accounting and provides decision support and control support. The goals of management accounting are to improve value and enhance decision making. It uses a single accounting system for multiple purposes like decisions, control, and taxes. Professional certifications in management accounting emphasize competencies like problem solving, communication, and ethics.
The document provides an introduction to managerial accounting and cost concepts. It discusses the differences between managerial and financial accounting, the planning and control cycle used by managers, classifications of costs as fixed or variable, and the flow of costs through the production process for a manufacturer. Key aspects covered include direct and indirect costs, product versus period costs, inventory flows, and calculating costs of goods manufactured and costs of goods sold.
POHR = $4 per DLH
Actual overhead applied = POHR x Total DLH
= $4 x 170,000 DLH
= $680,000
Therefore, actual overhead incurred ($650,000) is less than overhead applied ($680,000). An adjustment is required.
Abhay Bhutada, the Managing Director of Poonawalla Fincorp Limited, is an accomplished leader with over 15 years of experience in commercial and retail lending. A Qualified Chartered Accountant, he has been pivotal in leveraging technology to enhance financial services. Starting his career at Bank of India, he later founded TAB Capital Limited and co-founded Poonawalla Finance Private Limited, emphasizing digital lending. Under his leadership, Poonawalla Fincorp achieved a 'AAA' credit rating, integrating acquisitions and emphasizing corporate governance. Actively involved in industry forums and CSR initiatives, Abhay has been recognized with awards like "Young Entrepreneur of India 2017" and "40 under 40 Most Influential Leader for 2020-21." Personally, he values mindfulness, enjoys gardening, yoga, and sees every day as an opportunity for growth and improvement.
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Under the leadership of Abhay Bhutada, Poonawalla Fincorp has achieved record-low Non-Performing Assets (NPA) and witnessed unprecedented growth. Bhutada's strategic vision and effective management have significantly enhanced the company's financial health, showcasing a robust performance in the financial sector. This achievement underscores the company's resilience and ability to thrive in a competitive market, setting a new benchmark for operational excellence in the industry.
OJP data from firms like Vicinity Jobs have emerged as a complement to traditional sources of labour demand data, such as the Job Vacancy and Wages Survey (JVWS). Ibrahim Abuallail, PhD Candidate, University of Ottawa, presented research relating to bias in OJPs and a proposed approach to effectively adjust OJP data to complement existing official data (such as from the JVWS) and improve the measurement of labour demand.
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"Does Foreign Direct Investment Negatively Affect Preservation of Culture in the Global South? Case Studies in Thailand and Cambodia."
Do elements of globalization, such as Foreign Direct Investment (FDI), negatively affect the ability of countries in the Global South to preserve their culture? This research aims to answer this question by employing a cross-sectional comparative case study analysis utilizing methods of difference. Thailand and Cambodia are compared as they are in the same region and have a similar culture. The metric of difference between Thailand and Cambodia is their ability to preserve their culture. This ability is operationalized by their respective attitudes towards FDI; Thailand imposes stringent regulations and limitations on FDI while Cambodia does not hesitate to accept most FDI and imposes fewer limitations. The evidence from this study suggests that FDI from globally influential countries with high gross domestic products (GDPs) (e.g. China, U.S.) challenges the ability of countries with lower GDPs (e.g. Cambodia) to protect their culture. Furthermore, the ability, or lack thereof, of the receiving countries to protect their culture is amplified by the existence and implementation of restrictive FDI policies imposed by their governments.
My study abroad in Bali, Indonesia, inspired this research topic as I noticed how globalization is changing the culture of its people. I learned their language and way of life which helped me understand the beauty and importance of cultural preservation. I believe we could all benefit from learning new perspectives as they could help us ideate solutions to contemporary issues and empathize with others.
Independent Study - College of Wooster Research (2023-2024) FDI, Culture, Glo...AntoniaOwensDetwiler
"Does Foreign Direct Investment Negatively Affect Preservation of Culture in the Global South? Case Studies in Thailand and Cambodia."
Do elements of globalization, such as Foreign Direct Investment (FDI), negatively affect the ability of countries in the Global South to preserve their culture? This research aims to answer this question by employing a cross-sectional comparative case study analysis utilizing methods of difference. Thailand and Cambodia are compared as they are in the same region and have a similar culture. The metric of difference between Thailand and Cambodia is their ability to preserve their culture. This ability is operationalized by their respective attitudes towards FDI; Thailand imposes stringent regulations and limitations on FDI while Cambodia does not hesitate to accept most FDI and imposes fewer limitations. The evidence from this study suggests that FDI from globally influential countries with high gross domestic products (GDPs) (e.g. China, U.S.) challenges the ability of countries with lower GDPs (e.g. Cambodia) to protect their culture. Furthermore, the ability, or lack thereof, of the receiving countries to protect their culture is amplified by the existence and implementation of restrictive FDI policies imposed by their governments.
My study abroad in Bali, Indonesia, inspired this research topic as I noticed how globalization is changing the culture of its people. I learned their language and way of life which helped me understand the beauty and importance of cultural preservation. I believe we could all benefit from learning new perspectives as they could help us ideate solutions to contemporary issues and empathize with others.
Lecture slide titled Fraud Risk Mitigation, Webinar Lecture Delivered at the Society for West African Internal Audit Practitioners (SWAIAP) on Wednesday, November 8, 2023.
2. Material is the first and most important element of cost. Material
simply means any commodity or substance which is processed in a
factory in order to be converted into finished product. Materials may
b raw material, components, tools, spare parts, consumable stores etc.
Materials include both direct and indirect materials. Direct and
indirect materials purchased for stock purposes to be issued to
different jobs, work orders or departments as and when required are
known as stores
Materials
3. Direct Materials : Materials which form a part of a finished
product are known as direct materials. For ex- leather used
making pair of shoes or yarn required for cloth are direct
materials.
Indirect Materials : They cannot be treated as a part of finished
product because it cannot be conveniently and accurately allocated to
a particular unit of a product. For ex- nails used in making of shoes,
or button or threads used in stores etc.
Management accounting
4. It can be defined as a comprehensive framework for the accounting
and control of material cost designed with the object of maintaining
material supplies at a level so as to ensure uninterrupted production
but at the same time minimizing investment of funds.
It is the systematic control over the purchasing, storing, and using of
material so as to have the minimum possible cost of material. In
simple words, it is a system which ensures that right quality of
material is available in the right quantity at the right time and right
place with the right amount of investment.
Material Control
5. 1.Purchase Requisition
• A form known as ‘Purchase Requisition’ is commonly used
as a format requesting the purchase department to purchase
the required material.
• Normally the purchase requisition is issued by the Stores
Department when the quantity of the concerned material
reaches the minimum level
Procedures for Purchasing
6. 02. Select suitable suppliers
After the receipt of purchase requisition, the purchase
department places an order with a supplier, offering to buy
certain material at stated price and terms.
However before issuing the purchase order, quotations
may be invited from various suppliers for arriving at the
best deal
03. Purchase order
purchase order is issued to the selected supplier. purchase
order is a legal document and it results into a contract
between the company and the supplier.
Con,t
7. Con,t
04.Receiving the Materials
The receiving department performs the function of
unloading and unpacking materials which are
received by an organization.
05. Approval of invoice
Approval of invoice indicates that goods are
purchased according to the purchase order have
been received and payments can be made for the
same amounts.
8. Con,t
06. Making the Payment
After the invoice is approved the payment is made
to the supplier
9. Accounting for Stock
movement
Material is being moved between different stages, and each
stage is being accounted for in the materials accounts.
When material moves from one department to another, the
material account is being debited. And when the material is
being moved out from each department after the process,
the material account is being credited.
Stages through which material is being moved normally is
as below:
10. Con,t
Supplier-Stores: Here, raw material is being purchased
and moved from suppliers’ warehouses to the company’s
stores.
Stores-work in progress: Here, raw material is being
transferred from stores to the manufacturing process, i.e.,
goods are being processed. Thus, work in progress
account is being maintained at this stage.
11. Con,t
Work in progress-Finished goods: At this stage,
work in progress goods are fully manufactured and
transferred to the finished goods department for
storage.
Finished goods-customer: Here, finished products
are sold to the customer and transferred to the
customer’s place.
12. Con,t
Therefore, there are certain stages through which
raw material is moved. While moving the raw
material, various costs and expenses are being
incurred. So, management has to take various
decisions regarding the reduction of costs. As a
result, the need for material control arises in the
manufacturing industry.
13. Selected Materials Accounting
Transactions
Materials purchased from vendor.
Materials XX
Accounts Payable XX
Materials issued to production.
Work in Process XX
Materials XX
14. Con,t
Payment to vendor for invoice.
Accounts Payable XX
Cash XX
Transfer finished work to finished goods.
Finished Goods XX
Work in Process XX
15. Con,t
Sale of finished goods on account.
Accounts Receivable XX
Sales XX
Cost of Goods Sold XX
Finished Goods Inventory XX
Collection of cash from customer.
Cash XX
Accounts Receivable XX
16.
17. Determining the Cost of
Materials Issued
In selecting the method to be used, the company
should review their accounting policies and the
federal and state tax regulations.
The flow of materials does not dictate the flow of
costs.
– Flow of materials – the order that materials are issued for use
in the factory.
– Flow of costs – the order in which unit costs are assigned to
materials.
18. Cost Flow Methods
First – In, First – Out Method (FIFO)
– Assumes that materials used in production are costed at the
prices paid for the oldest materials and the ending inventory is
costed at the prices paid for the most recent purchases.
Moving Average Method
–Material issued and the ending inventory are
costed at the average price. This average unit
price is computed every time a new lot of
materials is received and it continues to be used
until another lot is purchased.
19. Determination of optimum
purchase quantities
The optimal order quantity, also called the economic order
quantity, is the most cost-effective amount of a product to
purchase at a given time. It's an important calculation,
because holding too much stock is expensive.
Not only are you tying up money you could be using
somewhere else, holding surplus stock may result in
unnecessary storage, administrative, financing and
insurance costs.
20. Economic order quantity (EOQ) is the order size that
minimizes the sum of ordering and holding costs related to
raw materials or merchandise inventories.
In other words, it is the optimal inventory size that should
be ordered with the supplier to minimize the total annual
inventory cost of the business. Other names used for
economic order quantity are optimal order size and
optimal order quantity
21. The two significant factors that are considered while
determining the economic order quantity (EOQ) for any
business are the ordering costs and the holding costs. A
brief explanation of both the costs is given below:
A.The ordering costs are the costs that are incurred every
time an order for inventory is placed with the supplier.
Examples of these costs include telephone charges,
delivery charges, invoice verification expenses and
payment processing expenses etc.
22. B.The holding costs (also known as carrying costs) are the
costs that are incurred to hold the inventory in a store or
warehouse. Examples of costs associated with holding of
inventory include occupancy of storage space, rent,
shrinkage, deterioration, obsolescence, insurance and
property tax etc.
NB:-The economic order quantity is the level of quantity
at which the combined ordering and holding cost is at the
minimum level.
23. To calculate the optimal order quantity of raw materials the
following formula is used:
Q = √ 2DK/G
Q = optimal order quantity
D = annual demand quantity of the raw material in question
K = cost of placing the order
G = cost of storing one unit in the warehouse for a specific amount of
time
24. EX. Let’s imagine there’s a company called OKk that
manufactures and distributes corks for wine producers in
its area. To satisfy its annual production of 10,000 units,
throughout the year, the business procures 2,000 units of
raw materials (cork oak). If each order costs Br.200,
including transportation expenses, and the cost of storing
the product is amounts to Br.3,000 a year, what’s the ideal
order amount?
25. In this case, the optimal order quantity of the raw materials
would be solved from the square root of the formula
2*200*2000/3000, the result of which is 16 units .
Q = √ 2*2000*200/3,000 =16 units
Therefore, the company should place annual orders of 16 units in
order to have the most appropriate number of units of cork oak to
produce cork, thereby avoiding the excessive storage of raw material
and potential stock-outs. So, the company should place 125 annual
orders of 16 units to procure the 2,000 units of cork oak.
26. Identification and accounting
for stock losses
Stocktaking refers to the physical verification of stocks in a store
and checking the result against the book stocks. This may be done on
a continuous (more frequent) or periodic basis.
a. Continuous Stocktaking
This is the counting and valuing of physical stocks more frequently.
This involves a specialist team counting and checking a number of
stock items on daily basis, so that each item is checked at least once
a year. Valuable items with high turnover could be checked more
frequently.
b. Periodic Stocktaking
This is the counting and valuing of physical stocks at the end of an
accounting period, usually annually. This system is suitable where
low levels of stocks are carried.
27. Con,t
The physical stocks counted in a store may be different
from the book stocks in the stock records. This discrepancy
must be investigated so as to prevent further occurrence.
The following may be the causes of stock discrepancies:
1.Poor record keeping such as omissions or over/under
statement of receipts and issues of stocks.
2.Theft or pilferage
3. Damages, deterioration or evaporation
4. Errors in stock count.
28. Con,t
Stock Loss is simply the discrepancy/difference between actual
physical stock values compared to book value of stock. Stock loss
is normally incurred when stock is lost in a fire or stolen/pilferage.
Opening stock X
Add: Purchases X
Stocks Available for use X
Less: Stock issued/used (X)
Closing Stock X
Less: Physical stock value (X)
Stock Loss value X
29. Con,t
Ex. Mr. A is a sole proprietor and on 31 December 2015, he
valued his stock at Br.69,500. On 27 January 2016, his
shop was broken into and his stock was stolen with the
exception of stocks valued at Br.10,450 .The following
details are given during the month:
(a) Purchases received from 1 to 27 January 2016 amounted
to Br.31,500
(b) Stocks issued/used during the same period amounted to
Br.40,480 and all these stocks has been delivered before
the break-in.
30. Computation the stock loss actually stolen.
Opening Stock before stolen Br.69,500
Add: Purchases 31,500
Stocks available for use 101,000
Less: Stocks issued/used (40,480)
Original/Actual closing stock valuation 60,520
Less: Stock not stolen (10,450)
Cost of stock loss Br.50,070
31. Increase market share
year-over-year by at least
five percent
Planning
Planning is the detailed formulation of action to
achieve a particular end.
Setting
objectives
Identifying methods to
achieve those
objectives
Example
• Consider diversification
• Sell More to Current Customers
• Try Different Types of Channels
• Target a New Market Segment
32. Directing and motivating
Directing and motivating involves coordinating diverse
activities and human resources to produce a smooth-
running operation.
This function relates to the implementation of planned
objectives.
Most companies prepare organization charts to show
– the interrelationship of activities, and the delegation of authority
and responsibility within the company.
33. Controlling
Controlling is the managerial activity of
monitoring a plan’s implementation and taking
corrective action as needed.
Compare
Actual
Performance
Expected
Performance
34. Controlling
Controlling is the process of keeping the firm’s
activities on track.
In controlling operations, management determines
–whether planned goals are being met, and
–what changes are necessary when there are
deviations from targeted objectives.
35. Decision Making
Decision making is the process of choosing among competing
alternatives.
This managerial function is intertwined with planning and control
manager cannot successfully plan or control the organization’s
actions without making decisions regarding competing alternatives
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37. Management Functions Review
– While managers are planning future operations, accountants will help
them by preparing budgets (financial plan) and special reports.
– While managers are executing what is planned, accountants will help them
in measuring, recording and properly classifying the transactions
completed by the management for the preparation of financial reports.
– While managers are assessing whether the planned activities are
implemented as intended the evaluation phase, accountants will help
managers in supplying performance evaluation reports which show the
planned target, the actual results, the variance (deviation of actual results
from the planned targets) and the possible causes for the variance.
38. Cost terminologies and
classification
To perform the three management functions effectively,
management needs information. One very important type of
information is related to costs. For example, questions such as
the following need answering:
– What costs are involved in making the product?
– If production volume is decreased, will costs decrease?
– What impact will automation have on total costs?
– How can costs best be controlled in the organization?
39. Cost terminologies and
classification
Accountants define cost as a resource sacrificed or
forgone to achieve a specific objective. It is usually
measured as the monetary that must be paid to acquire
goods and services. In the above definition there are two
important ideas included:-
a. Cost measures the use of resources in terms monetary
units. Cost measures the use of labor hours, materials,
machine hours and other inputs in terms of monetary units
40. Cost terminologies and
classification
b. Cost measurement is related to a particular purpose or
activity. This purpose is referred to as a cost object. Cost
object is defined as anything for which a separate
measurement of costs is desired. To quite their decisions,
managers want to know how much a particular thing (such
as a product, services, machine or process) costs, we call
this thing cost object.
41. Manufacturing costs
Manufacturing consists of activities and processes
that convert raw materials into finished goods.
Manufacturing costs are usually classified as follows:
–Direct Materials
–Direct Labor
–Manufacturing Overhead
42. Manufacturing Costs:
Direct Materials
Raw materials represent the basic materials and
parts that are to be used in the manufacturing
process.
Raw materials that can be physically and
conveniently associated with the finished product
during the manufacturing process are termed
direct materials.
43. Manufacturing Costs:
Indirect Materials
Some raw materials cannot be easily associated with the
finished product. These are considered indirect
materials.
Indirect materials
– do not physically become part of the finished
product, or
– cannot be traced because their physical association
with the finished product is too small in terms of
cost.
Indirect materials are accounted for as part of
manufacturing overhead.
44. Manufacturing Costs:
Direct Labor
Direct labor is the work of factory employees
that can be physically and conveniently
associated with converting raw materials into
finished goods.
DIRECT LABOR
45. Manufacturing Costs:
Indirect Labor
The wages of maintenance people, timekeepers,
and supervisors are normally categorized as
indirect labor because their efforts have no
physical association with the finished product or it
is impractical to trace the costs to the goods
provided. Like indirect materials, indirect labor is
part of manufacturing overhead.
46. Manufacturing overhead consists of costs that are indirectly
associated with the manufacture of the finished product. These costs
may also be defined as manufacturing costs that cannot be classified
as either direct materials or direct labor.
Manufacturing overhead includes
– indirect materials;
– indirect labor;
– depreciation on factory buildings and machinery; and
– insurance, taxes, and maintenance on factory facilities.
Manufacturing Costs:
Manufacturing Overhead
47. Product Costs
Product costs (also called inventoriable costs) include
each of the manufacturing cost elements (direct materials,
direct labor, and manufacturing overhead). They are the
costs that are a necessary and integral part of producing
the finished product.
These costs are not expensed (as cost of goods sold) under
the matching principle until the finished goods inventory is
sold.
48. Product Costs:
Prime and Conversion
Direct materials and direct labor are often referred
to as prime costs due to their direct association
with the manufacturing of the finished product.
Direct labor and manufacturing overhead are often
referred to as conversion costs since they are
incurred in converting raw materials into finished
goods.
49. Period Costs
Period costs are identifiable with a specific time
period rather than a salable product.
Period costs are deducted from revenues in the
period in which they are incurred.
Period costs relate to nonmanufacturing, (thus,
noninventoriable) costs, and include selling and
administrative expenses.
50. All Costs
Product Versus Period Costs
Direct Materials
Direct Labor
Manufacturing
Overhead
Selling
Expenses
Administrative
Expenses
Prime
Costs
Conversion
Costs
Product Costs
Manufacturing Costs
(Go to Balance Sheet before
Income Statement)
Period Costs
Nonmanufacturing Costs
(Go straight to Income Statement)
51. Product Costs Versus Period
Costs
Product costs include
direct materials, direct
labor, and
manufacturing
overhead.
Period costs are not
included in product
costs. They are
expensed on the
income statement.
Inventory Cost of Good Sold
Balance
Sheet
Income
Statement
Sale
Expense
Income
Statement
52. Nonmanufacturing Costs
Marketing and selling costs . . .
–Costs necessary to get the order and deliver the
product.
Administrative costs . . .
–All executive, organizational, and clerical costs.
53. Variable and Fixed costs
How a cost will react to changes in the level of
business activity.
Total variable costs change when activity changes.
Total fixed costs remain unchanged when activity
changes.
54. Variable and Fixed costs
Behavior of Cost (within the relevant range)
Cost In Total Per Unit
Variable Total variable cost changes Variable cost per unit remains
as activity level changes. the same over wide ranges
of activity.
Fixed Total fixed cost remains Fixed cost per unit goes
the same even when the down as activity level goes up.
activity level changes.
55. Direct Costs and Indirect Costs
Direct costs
Costs that can be
easily and conveniently
traced to a unit of product
or other cost objective.
Examples: direct material
and direct labor
Indirect costs
Costs cannot be easily
and conveniently traced
to a unit of product or
other cost object.
Example: manufacturing
overhead
56. Opportunity Costs
The potential benefit that is given up when
one alternative is selected over another.
• Example: If you were not attending college,
you could be earning Br.150,000 per year.
Your opportunity cost of attending college for one
year is Br.150,000.
57. Sunk Costs
Sunk costs cannot be changed by any decision.
They are not differential costs and should be
ignored when making decisions.
• Example: You bought an automobile that cost
$10,000 two years ago. The $10,000 cost is sunk
because whether you drive it, park it, trade it, or
sell it, you cannot change the $10,000 cost.
58. Avoidable and Unavoidable Costs
Avoidable costs are costs that will not
continue if an ongoing operation is changed or
deleted.
Unavoidable costs are costs that continue even
if an operation is halted.
59. Standard cost, Budgeted cost
Actual Cost
Standard cost refers to the pre-established or pre-determined cost
required to manufacture one product unit. It consists of an estimate
of the costs that are expected when producing a particular product.
The term standard cost refers to a specific cost per unit.
Budgeted cost refers to costs in total given a certain level of activity.
Actual Costs, on the other hand, are those realized during the period
and compared at the end of the period. This difference between the
standard cost vs actual cost is termed as Variance.
60. Cost Unit
Cost Unit is defined as Unit of quantity of product, service or time in
relation to which costs may be ascertained or expressed. A cost unit
refers to the unit of quantity of product, service or time (or
combination of these) in relation to which costs may be ascertained
or expressed. A cost unit may be expressed in terms of number,
length, area, weight, volume, time, or value. The following are
examples of cost units applied in different industries:
Electric Company-Cost unit per unit
Transport Companies-Cost unit per kilometer
Steel Companies-Cost unit per ton
61. cost center and profit center
A cost center is a reporting unit of a business that is responsible for
costs incurred. An example of a cost center is the maintenance
department of a business, where its manager is only rated on the
amount of costs incurred to maintain facilities and equipment at a
predetermined level. Similarly, the accounting, finance, information
technology, and human resources departments are all treated as cost
centers.
A profit center is a reporting unit of a business that is responsible for
profits generated. An example of a profit center is a subsidiary,
which is responsible for the amount of sales generated, as well as all
costs incurred. profit center is responsible for both its revenues and
costs.
62. Linear, curvilinear and step
functions
A linear cost function is a mathematical method used by businesses
to determine the total costs associated with a specific amount of
production. This method of cost estimation can be done whenever the
cost for each unit produced remains the same no matter how many
units are produced.
When that is the case, the linear cost function can be calculated by
adding the variable cost, which is the cost per unit multiplied by the
units produced, to the fixed costs. Performing this equation will give
the total cost for a production order, thus enabling businesses
to budget accordingly and make decisions on production amounts.
63. Con,t
This is the function where the cost curve of a particular product will
be a straight line. Mostly this function is used to find the total cost of
"x" units of the products produced. For any product, if the cost curve
is linear, the linear cost function of the product will be in the form of
y = Ax + B
y = total cost
x = number of units produced
A = cost per unit
B = total fixed costs
The total cost of producing two dresses is Br.130 , and the production
cost of 5 similar dresses is Br.190 . By assuming a linear cost
function, what is the cost of producing 8 such dresses?
64. Con,t
Curvilinear costs increase at a non-constant rate as volume
increases. When volume and costs are graphed, curvilinear costs
appear as a curved line that starts at the graph origin (total cost is
zero when volume is zero) and increases at different rates.
There exists a linear correlation if the ratio of change in the two
variables is constant. If we plot these coordinates on a graph, we will
get a straight line. There exists a curvilinear correlation if the change
in the variables is not constant. If we plot these coordinates on a
graph, we will get a curve.
65. Con,t
Step costs are costs that do not change in direct proportion to
increasing levels of activity. In other words, step costs are constant
at a certain activity level but increase or decrease when an activity
threshold is met.
Example. John operates a company that produces pens. A machine
costing Br.15,000 is capable of producing up to 1,000 pens. Assume
that there are no additional costs related to producing pens (no raw
materials, labor, etc.). As such, the cost of machinery is an example
of a step cost.
66. Con,t
As shown in the above illustration, the cost of machinery closely
resembles steps. At a production of 500 or 750 pens, only one
machine is required. The total cost is, therefore, Br.15,000. However,
at the production of 1,500, the company must purchase an additional
machine to expand its production capacity.
At a production of 1,500 pens, the total cost is Br.30,000 (Br.15,000 x
2 machines). Therefore, it is an example of a step cost: costs that are
constant at a certain level of activity and rise or decrease when a
certain activity threshold is met.