2. Learning Objectives Cost behaviour analysis - variable, fixed and mixed cost behaviour. Explain the costs involved in manufacturing activities – direct material, direct labour and overhead.
3. Cost Behaviour Analysis Cost behaviour analysis: Examines how costs behave when levels of business activity change: Some costs change Some costs stay the same Helps in planning and choosing between alternatives. Starts with identification of key activities and their relationships with various costs.
4. Variable Costs Variable costs change in total with increases and decreases in activity level. e.g. direct materials, direct labour, COGS, freight costs, fuel They are identified on a per-unit basis Variable costs stay the same per unit as activity level changes. Total variable costs change in proportion to change in activity level.
6. Fixed Costs Fixed costs do not change with increases and decreases in activity level. e.g. rates, rent, insurance, supervisors’ salaries Fixed cost per unit = total cost divided by units of activity level. Total fixed costs stay the same. Fixed cost per unit changes as activity level changes.
8. Mixed Costs Mixed costs are also called semi-variable costs. Mixed costs includes a fixed cost component plus a variable cost according to activity level. e.g. telephone (fixed line charge plus charge per unit consumed) Mixed costs are often separated into fixed and variable components at end of period.
10. Importance of Identifying Costs Identification of costs as fixed or variable is important for business decisions: 1. Effect on profitability of reduction in sales price. Effect on activity level when expenses increase per unit to keep current profitability. Minimum level of sales to cover costs. Costs of maintaining level of production for different manufacturing methods.
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12. Direct labour: the work of factory employees that are directly involved in producing the product.
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14. Product Costs – costs that are necessary and integral part of producing the finished product. Direct labour and manufacturing overhead are incurred in converting raw materials into finished goods, these costs elements are often referred to as conversion costs. Period costs– costs that are identified with a specific time period rather with a salable product. These costs relate to non-manufacturing costs and therefore are not inventorial costs.
15. Manufacturing Costs in Financial Statements Format Manufacturing Accounts ABC Manufacturing Company Manufacturing account for the year ended December 2007 Direct MaterialsRMRM Raw material as at 1 January 2007 xx Add: Purchases of Raw Material xx Carriage Inward xx Import Duty xx Total Raw Material Available for Use xxx (-) Raw material as at 31 December 2007 (xx) DIRECT MATERIAL USED xxx Direct Labour Wages xxx Direct Expensesxxx PRIME COSTS xxx
16. Continue.. PRIME COSTS xxx Overhead Costs Indirect Labor xx Factory repairs xx Depreciation – factory machine xx TOTAL OVERHEAD COSTSxxx TOTAL MANUFACTURING COSTS xxx Add: WIP – Opening xx Less: WIP – Closing (xx) COST OF GOODS MANUFACTUREDXXX
17. ABC Manufacturing Company Income Statement for the year ended December 2007 RMRM Sales xxx Less: Cost of Goods Sold: Finished goods – 1 Jan xx Add:Cost of goods manufacturedxx Goods Available for Sale xx Less: Finished goods – 31 Dec (xx) COST OF GOOD SOLDxx GROSS PROFIT XX Less: Operating Expenses Selling and Distribution Expenses xx Administrative Expenses xx NET / LOSS XX
18. Mutiara Ltd incurs the following manufacturing costs and expenses during the month of May. 1. Assembly line wages 2. Raw materials used directly in product 3. Depreciation on office equipment 4. Property taxes on factory building 5. Rent on factory building 6. Sales commissions 7. Depreciation on factory equipment 8. Factory utilities 9. Wages for factory maintenance workers 10. Advertising 11. Indirect materials used in production 12. Factory manager's salary