COST CLASSIFICATION AND BEHAVIOUR.
Cost: Reflects a monetary measure of the resources sacrificed or forgone to achieve a benefit such as acquiring a good or service. The term has multiple meanings: Different types of costs are used in different situations. Costs are developed and used for some specific purposes. The way a cost is used is to be used will define the way it should be computed. Cost Object: Any activity for which a separate measurement of cost is required. Something for which we want to compute a cost e.g. Product Product Line Department Division Geographical Area Cost unit: Unit of Production / service in relation to which cost are ascertained the unit is what is most relevant ...view middle of the document...
Consists all the materials that can be identified to a specific product unless it has negligible costs. Direct material cost are charged to the product as part of the prime cost example include, component parts specifically purchased for a particular job order or process. Part finished work is transformed from department 1 to department 2. This will become a finished work of department 1 but a direct material cost in department 2. Primary packing material like cartons and boxes.
Direct Labour Consists of those labour costs that can be specifically traced or identified with a particular product. Example. Wages of operatives who assemble parts in the finished product. Wages to inspectors, analysts, testers specifically required for such productions. Foremen and anyone whose wages are specifically identified. N.B Salaries of factory supervisors or wages paid to staff in store department cannot specifically be identified to product therefore form part of indirect cost. Direct Expenses (Chargeable Expenses). - Expense incurred specifically for a particular job project or services. - E.g Royalties - Special design / Patent Right - Franchise - Hire of special machines or staff. BY FUNCTION. These are the costs classified as either - Production or - Non Production. i) Production Costs Costs incurred when raw materials are converted to finished goods and (WIP) - Prime Costs (D Materials: D Labour: D Expenses) - Factory overheads (Variable production overheads, Fixed production overheads).
ii) Non production Costs. Those costs which are not directly associated with production processes. Administration Selling Distribution Financing Costs.
Non Production Costs
Administration. Are incurred when managing and organization such as Office salaries / rent. - Office Salaries - Depreciation of furniture. Selling Cost incurred when creating demand for product and securing orders from customers - Advertisement - Sales Commission. - Discounts - Salary of sales manager. Distribution Incurred in getting finished product to customers - Delivery Costs - Depreciation of distribution means - Storage (Warehouse). Financing Cost. Costs incurred in order to finance an organization e.g. - Loan interest - Overdraft interest
Illustration. Skyline Company had following Cost for December 2006
Labour Cost Royalties Purchases Travelling Expenses Production Selling Administration Depreciation Machinery Production Administration Motor Vehicles Selling Administration Canteen Cost Commissions Salaries Office Salesmen Sales Display equipment Cost Other Expenses Production Selling Administration Carriage inward Carriage on goods sold Interest on loans Additional. i) ii) iii)
Amount 220,000 1,600 400,000 100 2,900 200
38,000 2,000 3,000 1,600 6,000 1,400 8,000 72,000 300 58,000 65,000 42,000 4,000 7,800 3,800
labour cost figures constitute...