Basic Costing Chapter 3,4,5

Page 1

Raw materials – the

materials bought by manufacturing organisations and used to manufacture the

finished products.

Work-in-progress – the

name given to partly-completed items in a manufacturing organisation.

Finished goods –

the items that have been manufactured and are ready for sale.

First in first out (FIFO) – a

method of inventory valuation that assumes that goods will be used up in order

that they are acquired (for valuation purposed only). This means that the remaining

balance will be valued based on the prices of more recent purchases.

Last in first out (LIFO) – this

method of inventory valuation assumes that the most recently acquired inventory

will be used first, leaving the earlier acquisitions to make up the value of

the remaining balance. This does not have to correspond with the actual order

of usage.

Average costs (AVCO) – this

inventory valuation method involves calculating a new weighted average cost of

goods each time that a new purchase is made, and using this valuation for

subsequent issues and balances until further purchases are made.

Manufacturing account – this

cost statement is produced at the end of a period to summarise costs under

various categories.

Direct materials –

this is calculated as the total of opening inventory of raw materials, plus

materials purchased, minus closing inventory of raw materials.

Prime cost –

the total of direct costs – in a manufacturing account it is calculated by

adding direct materials used in manufacture to direct labour.

Factory (manufacturing) cost –

a subtotal made up of the total if prime cost (direct materials and direct

labour) and manufacturing overheads.

Factory cost of goods manufactured – the

subtotal is the production costs of goods that have been completed and is made

up of factory (manufacturing) cot adjusted for inventories of work-in-progress.

Cost of goods sold – a

total based on the factory cost of goods manufactured which has been adjusted for

inventories of finished goods.

Chapter 3 Key terms

There are several methods of making labour payments.

These include time rate (including basic rates and overtime rates), time rates

with bonus systems, and piecework rates.

Labour costs can be classified and coded based on

the categories covered earlier in this book; these include cost and profit

centres, direct and indirect costs.

Labour costs can behave as fixed costs, variable

costs or semi-variable costs, depending on the method of payment.

Chapter 4 Summary

Time rate – the

method of remuneration when payment is on the basis of time spent at work; it can

be an hourly rate or based on a longer time period.

Basic rate – a

time rate that is applied to the normal contracted work time, and is usually an

hourly rate.

Overtime rate –

the rate (normally hourly) paid for time worked in excess of the normal

contracted time; it is usually at a higher rate than basic rate.

Piecework –

a payment system when the employee is paid for the work carried out (e.g. per

task or unit); this does not take any account of the time taken.

Bonus system –

a system used in conjunction with another payment method (for example time

rate, which provides additional payment for efficient working, e.g. production

that is more than a set level).

Chapter 4 Key terms

Managers at all levels

require information to enable them to make decisions, plan and control the

organisation. Costing information is an important part of the information that

they need.

Information requests

may need clarification so that the needs of the user are met when supplying the

information.

Comparisons of actual

data with budgeted figures make the actual data more useful for planning and

decision making. Differences between actual and budgeted data (called ‘variances’)

can be calculated in monetary and percentage terms, and significant differences

can be identified and actuated upon.

Reporting of variances

should be made to appropriate manager. This is normally the person who has

responsibility for the costs.

Chapter 5 Summary

Budget – a

financial planning document that is prepared in advance, and can be used to

help monitor and control costs.

Variances – the

difference between the actual data and the budgeted data.

Adverse variances –

these are ‘bad news’

·

In a performance

report when the actual income is lower than budget

·

In a performance

report when the actual cost is higher than budget

Favourable variances – these

are ‘good news’

·

In a performance

report when the actual cost is cost is lower than the budget

·

In a performance

report when the actual income is higher than budget

Significant variance – a

variance that is brought to the manager’s attention for further investigation

due to either its high monetary value or the high percentage of the variance

from the budget data.

Chapter 5 key terms

Basic Costing - Chapter 3

Basic Costing - Chapter 4

Basic Costing - Chapter 4

Basic Costing - Chapter 5

Basic Costing - Chapter 5