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Chapter 10 – Cost
accounting
LEARNERS SHOULD BE ABLE TO:
Calculate the following costs in a manufacturing environment:
• Variable and fixed cost
• The cost of producing a product using variable and fixed cost
• Unit costs
• Contribution per unit
• Break-even point
• The cost price of a product
Prepare ledger accounts of a manufacturing business (perpetual inventory system).
Balance Sheet Section:
• Raw material stock
• Work-in-progress stock
• Finished goods stock
• Consumable stores stock (indirect materials)
Nominal accounts section:
• Sales
• Cost of sales
• Factory wages
• Factory rent
• Depreciation on factory equipment, etc.
Cost accounting section:
• Direct (raw) materials cost
• Direct labour cost
• Factory overhead cost
• Administration cost
• Selling and distributing cost
• Integrate ethical issues related to a manufacturing environment
• Integrate internal audit and internal control issues related to a manufacturing
environment.
,Introduction
Trading enterprises buy finished products at a certain price and then add a mark-up
and sell the products at a higher price without changing the products in any way. Cost of
the products is simply the price that the business paid for the products.
Manufacturing enterprise purchases raw materials that are transformed during a
manufacturing process into finished products. Mark-up is then added, and the finished
products are sold. Cost of products are determined by adding all the costs incurred in
producing the product. To calculate this, the manufacturer must account for all material
costs, labour costs and factory overhead costs involved in the production process.
Types of manufacturing costs
Material costs
Material costs:
- consist of the costs of all raw
materials used in the manufacture
of a product.
Direct material costs:
These are the costs of all raw materials used directly in the manufacture of a product. These
raw materials can be identified in the final product.
Indirect material costs:
These are the costs of all raw materials used in the manufacturing process, which are either
not directly identifiable in the finished product or are a relatively insignificant part of the
finished product.
The indirect material costs form part of the factory overheads.
, Labour costs
Labour costs:
- Consist of the cost of all the labour
involved in the manufacture of a
product.
Direct labour costs
The salaries and wages paid to the employees who are directly involved in the manufacture
of a product. The work done by these employees can be directly identified in the
production process.
Indirect labour costs
The salaries and wages paid to the employees who are not directly involved in the
manufacture of a product. These employees are often involved with a range of different
products and the work done by these employees cannot be identified in the production
process of a specific product.
Indirect labour costs also form part of the factory overheads.
Factory overheads Factory overheads:
All indirect material costs and indirect labour costs. - all the costs of the manufacturing
process which are not directly
identifiable with a specific product.
Classification of manufacturing costs
Indirect material costs and indirect labour costs form part of factory overheads, therefore
manufacturing costs are generally classified under the following 3 headings:
Direct material costs
Direct labour costs
Factory overheads
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