Week 1- Cost

How do you calulate the cost of sales for a manufacturing business?

opening inventory + Purchases (cost of manufacting) - closing inventory

Give the formula for Cost of Sales in a trading business

opening inventory + purchases - closing inventory Added to the income statement

Give the formula for Cost of Sales (aka cost of goods sold) in a manufacturing business

opening inventory of finished goods + cost of goods manufactured - closing inventory Added to the income statement

What is one way can we classify costs?

1) Capitalised costs 2) Expensed costs

Recall the manufacturing costs (product costs for a manufactring firm)

1) Direct materials 2) Direct labour 3) Manufacturing overhead

What is another way of classifying costs?

1) Product costs 2) Period costs

For a manufacturing business what is included in the inventory held?

1) Raw materials - materials held for use 2) Work-in-progress - unfinished goods 3) Finished goods held for sale

Define cost object

A cost object is any item for which a separate cost measurement is required, for example, a product or a customer. e.g if you are amanufacting business producing chairs- the chair is a cost object.

Define stepped fixed costs

After a certain level of activity the fixed cost goes up For example we rent one factory which has the capacity to produce 1000 cars To produce 1500 we must rent another factory so the total fixed costs rise

Which of the following are cost objects? A pint of milk produced by a dairy A call taken at a call centre One of a bank's business customers The home delivery service of a department store

All of them

What are period costs?

All other selling and administrative costs that are not included in product cost, such as advertising, salaries, depreciation etc. Anything after gross profit is period cost and anything before gross profit on the IS is a product cost.

Define opportunity cost

An opportunity cost is the loss of other alternatives when one alternative is chosen. For example, instead of using oil in production, one could keep it and sell it in the future to make a profit.

Define cost driver

Any factor that causes a change in the cost of an activity e.g if you are ordering and looking at the ordering cost, a cost driver would be number of orders there are.

What is a trading business?

Buy the goods and sell it on - do not add any extra value. e.g retail companies

Define total fixed cost graphically

Constant line

Define conversion cost

Direct labour + manufacturing overhead = conversion cost

Define prime cost

Direct material + Direct labour = prime costs

Consider a bread making firm what are the direct labour, direct materials and manufacturing overhead

Direct materials: flour, eggs, salt etc Direct labour: Employees wages who are directly baking the bread Overhead: If there is a staff canteen; the cost of running this canteen Any supervisors who overlook the people baking the bread.

Look at the following IS and SoFP for a service business

Earned fees (cost of services) is the equivalent of the product cost

Define semi variable cost

Graph does not start at point of origin so there are some fixed elements plus variable cost The fixed cost is the y interecept e.g like a mobile phone contract

For a trading business where does the inventory held get recorded?

In the current assets section in the SoFP - this is the closing inventory

For a trading business where does the cost of sales get recorded?

In the income statement

What is a service business and what is particular about its inventory or cost of sales?

Include: banks, universities, law firms etc No inventory or cost of sales They have operating expenses which are recorded in the IS

Define variable cost per unit graphically

It is constant

What is direct labour?

Labour costs that can be easily traced to individual units of product. e.g wages paid to car assembly workers

What is manufacturing overhead?

Manufactring costs that cannot be traced directly to specific units produced. They include: Indirect material Indirect labour Factory overheads e.g -cleaning products to cleans a fryer in Burger King -electricity used in the factory -depreciaiton of equipment and building -factory supplies (not directly linked to product)

When ask for the cost of manufactured vs manufacturing what is the difference?

Manufactured is the cost of goods sold So starting with the initial work in progress (opening inventory) and then manufacturing costs and then minus the closing inventory. What are the manufacturing costs - these are the raw materials and work in progress which come from direct labour, direct materials and overhead costs

What are the direct materials?

Materials that become part of the product and can be directly traced to it. e.g a radio installed in a car

Give an example of indirect materials

Materials used to support the production process. Examples: Adhesives, oil, Personal protective equipment (helmets, gloves, overalls, etc.), disposables and cleaning supplies used in a car assembly plant.

What are the main decisions made in management accounting?

Operating decisions (short term): - Product mix - Pricing - Dividends (how much to pay out) Financing decisions: - The mix of debt and equity (debt tends to be a cheaper source of finance) (the money coming in) Investment decisions: - Whether to undertake a new project - Research and development - Take-over / disposal decisions (the money going out)

Define sunk cost

Sunk cost is a cost that has been incurred in the past and cannot be recovered. For example, if a restaurant-owners renovates their restaurant they cannot get this money back.

What are cost of sales?

The cost of the three product costs for the goods you have sold.

Define total variable cost graphically

The graph starts at the origin and it a straght line y - cost x - level of activity

What are product costs?

The total cost of purchasing or producing goods / delivering services to customers Product cost is cost of sales and inventory held i.e how much each product costs us or how much each 'cost object' costs us?

What type of costs make up product costs for a manufactring business?

There are THREE 1) Direct materials 2) Direct labour 3) Manufacting overhead (indirect costs such as accounting deparment, HR etc))

Look at the following IS and SoFP for a trading business M&S

These inventory are finished goods

What is an expensed cost?

This has short term benefit and is recorded on a periodic basis as expenses in the Income Statement (IS)

Compare the activities of a manufacturing and trading firm

Trading: - Buy finished goods - Sell finished goods Manufacturing: - Buy raw materials - Produce and sell finished goods

Summarise how you add the product/period costs and capitalised/expense costs to the IS and SoFP

Two types of costs: 1) Product - Direct materials - Direct labour - Manufacturing overhead 2) Period - Selling/admin IS Capitalised cost entered in SoFP - things used in the future and held in the firm 1) Inventory - Raw materials - Work in progress - Finished goods (these finished goods can be sold and the cost of sales is entered on the IS as an expensed good)

Give an example of indirect labour

Wages paid to employees who are not directly involved in production work. Examples: maintenance workers, cleaners and security guards.

What is a capitalised cost?

When you are making a payment it can either be for a long term benfit (longer than a year) or short term benefit. When it is a long term benefit is more of a capitalised cost and is recorded as an asset in the Statement of Financial Postition (SoFP). e.g cost of a house

What would be a cost object for a:: a) Chocolate manufacturer b) Retail bank c) University

a) packaging, cocoa, chocolate bar etc b) IT system, employees, rent, customer c) an undergraduate students, lecturers