ACCN4 Manufacturing account, Unrealised profit, Marginal costing, Absorption costing and ABC

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Accounting Flashcards on ACCN4 Manufacturing account, Unrealised profit, Marginal costing, Absorption costing and ABC, created by umer.sabir on 05/15/2014.

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PRIME COST section of manufacturing account Opening stock of raw materials Add: Purchases of raw materials Add: Carriage inwards Less: Purchase returns Less: Closing stock of raw materials Equals: COST OF RM CONSUMED Add: Direct labour Add:Direct expenses Equals: PRIME COST
MANUFACTURING OVERHEADS section of manufacturing account Factory overheads: Add: Indirect labour Add: Rent of factory Add Depn of machinery Add: Opening work in progress Less: Closing work in progress Equals: PRODUCTION COST OF GOODS COMPLETED
Income statement layout of manufacturing business Sales COST OF SALES: Opening stock of finished goods Add: Production cost of goods completed Less: Closing stock of finished goods GROSS PROFIT Less: Non-production overheads NET PROFIT
What is work in progress? Partly finished goods that are not yet fully completed to be sold
How is inventory recorded in the balance sheet of a manufacturing business? There are 3 types of stock to be recorded under current assets: 1. Stock of raw materials 2. Stock of work in progress 3. Stock of finished goods
What is transfer price? Manufacturing businesses transfer their products from the factory to the income statement at cost plus mark up percentage
Why do you have to adjust for unrealised profit? 1. Inventory should be valued at the lower of cost and NRV 2. Realisation concept states that profits should not be included until fully realised. 3. Prudence concept states that profit should be understated rather than overstated
How do we calculate provision for unrealised profit? Inventory at cost plus mark up x percentage ------------------------------- 100 + percentage
How is provision for unrealised profit treated in the balance sheet? Total provision for that year is deducted from inventory of finished goods under current assets
How is provision for unrealised profit treated in the income statement? 1. Increase - Deducted from gross profit 2. Decrease - Added to gross profit
How do you calculate marginal cost per unit? Total variable (direct) costs per unit
Define variable costs Vary with level of production (output) e.g. direct materials and direct labour
Define fixed costs Do not vary with the level of production (output) e.g. rent
Define semi-variable costs Partly fixed and partly variable e.g. telephone costs which have fixed line rental but variable charge per call
What is contribution and how is it calculated? Is the profit made before deducting fixed costs to get profit. Selling price - Variable costs
How do you calculate the number of units to be sold to break even? Total fixed costs ---------------------------- Contribution per unit
How do you calculate the revenue at break even point? Total fixed costs ------------------------------------ Contribution per unit/Selling price per unit
What is margin of safety? The difference between the amount of sales made and the amount needed to break even
How do you calculate margin of safety? Current output - B.E output x100 ------------------------- Current output
How do you calculate units needed to be sold to reach target profit? Total fixed costs + Target profit ------------------------------- Contribution per unit
In what situations can you apply marginal costing? 1. Whether to make or buy a product 2. Whether to accept a special order 3. How to maximise profits when limited resources are available
What are make or buy decisions? When business decides to whether to continue manufacturing product or buy in from outside supplier
Steps in producing an optimum production plan 1. Calculate contribution per unit 2. Calculate contribution per limiting factor e.g. per labour hour 3. Rank products in order with highest contribution being first 4. Produce a production plan that would maximise profits
What is absorption costing? Absorbs all factory overheads in total production cost of each unit
Steps in calculating overhead absorption rate (OAR) 1. Distinguish between production departments (cutting) and service departments (canteen) 2. Decide what basis to use to apportion overheads 3. Apportion overheads between all departments 4. Re-apportion overheads from service departments
How to calculate OAR Department overheads in pounds (£) ---------------------------------------- Department dircet machine/labour hours Choosing machine or labour hours depends on how capital intensive or labour intensive the department is
What is a cost unit? Unit of output to which costs can be charged
What is a cost centre? Sections of a business where costs can be charged
What is activity based costing? Charges overheads to output on the basis of activities
What are cost drivers? Activities which cause costs to be incurred
What are cost pools? Groups of overhead costs that are incurred by the same activity
Advantages of ABC 1. Cost information is more accurate 2. Can identify costs relating to different products instead of whole business. 3. Management information in decision making is improved. 4. More accurate calculations of selling price can be made. 5. Identifies areas of waste and inefficiency.
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